The Option Investor Newsletter Sunday 05-26-2002 Copyright 2001, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. Entire newsletter best viewed in COURIER 10 font for alignment Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 5-24 WE 5-17 WE 5-10 WE 5-3 DOW 10104.26 -248.82 10353.08 +413.16 9939.92 - 66.68 + 95.88 Nasdaq 1661.49 - 79.90 1741.39 +140.54 1600.85 - 12.15 - 50.89 S&P-100 539.92 - 13.38 553.30 + 30.06 523.24 - 7.28 - 1.85 S&P-500 1083.82 - 22.77 1106.59 + 51.60 1054.99 - 18.44 - 2.89 W5000 10250.64 -223.54 10474.18 +456.71 10017.47 -184.57 - 5.42 RUT 493.64 - 15.30 508.94 + 16.21 492.73 - 19.59 + 10.82 TRAN 2743.67 - 54.69 2798.36 +155.26 2643.10 -100.46 + 20.93 VIX 21.16 + .88 20.28 - 4.75 25.03 + 1.80 - 1.41 VXN 42.86 - .08 42.94 - 7.79 50.73 + 4.47 + 4.02 TRIN 1.59 0.78 2.56 1.71 TICK +286 +651 +364 +910 Put/Call .82 .72 .83 .91 ****************************************************************** Indian Givers? by Jim Brown The +413 point gain for the Dow last week was followed by a -248 loss this week. The +140 Nasdaq gain shrank with a -80 point loss this week. Bears took back the gifts from last week on mixed economic reports, terrorist warnings, downgrades and cautious guidance from tech companies. The bulls tried to circle the wagons several times on Friday but were unable to shake off the urge to go home flat. Economically the week was mixed. The Durable Goods orders were up strongly but the GDP dropped instead of gaining as expected. New Home Sales rose higher than expected while Retail Sales slipped. Terrorist warnings were issued for buses, trains and even attacks by scuba divers. Scuba divers? The markets did not know which way to turn and simply ended up going in circles instead. The typically bullish pre-holiday week ended with the Dow, Nasdaq and S&P threatening to break critical support levels of 10100/1660/1080. On Friday the GDP report soured the day with a downward revision to +5.6% growth when analysts had expected an upward revision to +6.0%. A couple months ago traders would have traded their first born for a GDP over +3% but suddenly a measly +5.6% was not good enough. The news it appears was already priced in. The culprits were a downward revision in consumer and business spending. Inventory investment was revised upward meaning sales were not keeping pace with manufacturing. These numbers are for the 1Q, which is ancient history for traders. Analysts are now expecting the 2Q GDP to be more in the +2% to +3% range. While this is decent growth it is not enough to support the gains in the market according to (bearish) analysts. The bullish view of course is that the recovery is underway and yes, we know it is slow but it is growth. Expect this debate to be argued for months to come. The New Home Sales posted another strong month with 915,000 annualized sales for the month of April. The consensus estimate was only 880,000. High end home sales, over $300,000, were strongest. There was no evidence of any pullback and with the economy still weak the Fed is not likely to raise rates anytime soon. The mortgage rates dropped below 7% again this week. The big news for the week was a series of downgrades on techs. There were two separate downgrades on the software sector this week prompted by no growth in IT spending. Almost every stock was named in these cautious comments. As if that was not enough Goldman took on the chip equipment sector on Friday with a downgrade on a weaker outlook. They used the AMAT comments of +50% growth in orders this quarter compared to only a +10% to +15% expected growth for 3Q as evidence that the inventory replenishment cycle had run its course. The SOX dropped -7.6% for the week after leading the tech rally last week. Solomon Smith Barney disagreed with the Goldman downgrade saying the book-to-bill was evidence the recovery was gaining speed. Goldman countered saying the saturation of manufacturing capability would hinder profit growth for some time. Stock prices are rich with the AMAT TTM PE over 60 and NVLS over 50. The lack of business did not keep SUNW from affirming estimates for this quarter but they did it on cost cutting not an increase in sales. They said in the analyst call on Thursday that order flow was not as smooth as the first quarter. (translation = we are having trouble closing sales and things are really tight) Another indicator of the weakness in business spending was the next round of layoffs begun by IBM. IBM said an unspecified number of workers were laid off this week at various computer manufacturing plants. An industry official said over 1000 workers were cut at server plants. Insiders who claim to know what is coming claim IBM is going to cut as many as 9,540 jobs. You can bet that ANY growing strength in business orders would have prevented IBM from cutting thousands of highly skilled workers at this stage in the economic recovery. Despite the negative news above First Call is claiming that they are seeing many more positive pre-announcements and fewer earnings warnings than they expected. The federal government released an obscure report that said information from nearly five million small business tax returns showed profits to by up +.9%. This was for the same period that the S&P showed a -11.5% drop in earnings. Let's hope the Feds are right and there is a stealth recovery in progress. With all the earnings for the last couple quarters coming from cost cutting any top line growth should go directly to the bottom line. Now that would be a problem traders would like to have. Planes, trains, buses and scuba divers? I think somebody has gone a little far in this CYA process. In an effort to cover all the bases the government issued yet another warning that terrorists could use scuba equipment to infiltrate our borders and harbors to execute attacks. There are many opportunities to make fun of this warning, but I will leave that up to your imagination. It is a serious matter but scuba divers? What is next? Hot air balloons? The Pakistan/Indian conflict is heating up again. Pakistan warned everyone that they would be conducting a series of missile tests over the weekend in the Kashmir area. Let's see. You have countries shelling each other on a daily basis and you announce impending missile tests in the area. Does that sound a little strange? Either way the tension is not doing our markets any good. Neither is the peace, or lack thereof, in Israel. Suicide bombings are escalating again despite Arafat's request to stop. The combination of world events has acted to produce a run on gold which hit $320 an ounce this week. The gold bugs must be in heaven and I have heard several comments about $500 gold soon. Right, and oil will be $30 a barrel. Oh, it is almost $30 already? Pass the Krugerands! The pundits on stock TV were continually commenting that the market drop was immaterial since it came on the lightest volume day and week of the year. I bet that is comforting to know for everyone who bought calls last week. Surely your options did not go down "because the low volume does not count", right? Just joking here but I don't care if it is 100,000 shares or one billion shares a drop is a drop and your money is lost. What they are trying to get across is that there is no conviction to this drop. It is not like there was a flood of sellers, there were just no buyers. Nobody wanted to buy and hold over the long weekend with terrorist warnings in the air and daily broker downgrades. The battle is underway in the markets. The bulls are becoming a little braver and critical support levels were rallying points on Friday afternoon. Dow 10100, Nasdaq 1660, S&P 1080. The few sellers left on the trading floor in late afternoon tried to break those levels and were unsuccessful. There are buyers out there, just not in sufficient strength to mount a rally. They are bargain hunting on each pullback. The advance/decline ratio was negative most of the day but it struggled to almost neutral in early afternoon even as the markets were falling. The TRIN at 1.69 is in bullish territory and indicating an oversold condition. The VIX is not cooperating however and hit a low of 20.60 during the days drop. The buyers are out there but they are just outnumbered. With the summer doldrums ahead it is likely that we will trade sideways between 9800 and 10300 for sometime. Check out the Index Trader wrap this weekend for a full update of support/resistance areas and the market outlook for next week. Our biggest contrarian indicator, Ralph Acompora, came out of hiding and was a guest on the Rukeyser show Friday night. He was very careful to say he was clueless about the Nasdaq direction and was very vague in his answers. Darn, he must be on a short leash at Prudential these days. It is with great pleasure that we announce our fall seminar in Denver. It will be October 12th to 15th with an optional boot camp on Friday the 11th for those that would like a better foundation in the basic strategies. We will announce the speaker list in the coming weeks but you know we always have 12-15 well known personalities including your favorite Option Investor writers. What I can tell you is that we will start the event off on Friday night with a casino party with craps, roulette, black jack, etc. This get acquainted event will offer prizes for everyone and provide a relaxed atmosphere to rub shoulders with the speakers and other guests. Ask anybody who has been to one of our seminars. We start at 9:am Saturday morning and run non-stop until the close. We stop only to eat and sleep but we do feed you five times a day! You can save $200 off the registration price if you sign up before July-31st. Don't wait. Click here: http://www.OptionInvestor.com/seminar/fall2002/ Enter Very Passively, Exit Aggressively! Jim Brown Editor ******************** INDEX TRADER SUMMARY ******************** TECH & TERROR BLUES by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - A number of money managers, investors and talking media heads this past week thought that there would be upside follow through to the strong rebound that occurred the week before. Which by the way, was the best weekly gain since September in the S&P and the best in a year in Nasdaq. But, WRONG! There was instead another tech wreck. The S&P stocks seem to be developing a path of least resistance to the upside, but they can't rally in isolation without some participation by tech stocks. More downgrades of earnings estimates, such as for the semiconductors, put the lid on any impulse by investors to buy the former tech darlings. AND, of course we had the steady drumbeat of terror warnings, which seemed to rise in proportion to the criticisms of how potential clues to the 9/11 attack might have been ignored. Seems that middle eastern men wanting to learn to fly big commercial jets once airborne only, without bothering to get them back down, was noticed but the report did not go up the chain of command. Seems that the stupidity of the hijackers in making NO secret of this highly unusual desire was matched by the lack of any suspicion that this raised - only in America! I have a personal ire in this, as 670 of my Cantor Fitzgerald friends and colleagues died as a result. Anyway, the talk of more of the same has made investors and traders nervous to say the least. In terms of trade strategy, I favor buying S&P index calls to participate in the upside that should follow what I think is a bottoming process, that is not the trade of the day - rather more of a position play by going out to July options for example to give sufficient time for the unfolding of a larger trend. Volatility is low, as has been commented on extensively, so premiums are not hugely inflated. AM OUT OF THE OFFICE TUES AND WEDNESDAY, BACK IN ON THURSDAY (5/30), WHEN I RESUME MY COMMENTARIES. S&P 500 (SPX) Daily/Hourly charts: I've also been commenting about the readings on the daily stochastic model as seen above left, being closer to the high "overbought" side than the low "oversold" end of the scale. Given the tendency for the back and forth price swings that tend to be part of this situation, it appears that the appropriate strategy is to buy in what appears to be a zone of support, on a scale down basis. Trying to hit the exact level is far more difficult, especially in end of the day commentary, than to pick a "zone" of support. It seems that this area is 1075 to 1090 in the S&P 500 (SPX). As good strategy also always recognizes the worst possible case, I would say that that risk is for another leg down to the prior 1054 low, so either use an exit at 1070 or be willing to price average again in that area - this, not for the feint of heart and also a strategy I would only follow when in a market that is oversold on a weekly longer-term trend basis, as suggested on the weekly charts below. Since the appropriate outlines to the hourly chart trend channel outs are still shifting around, suggest you key off from the prior upswing highs and downswing lows more than anything, as potential support and resistance area -- noted on the charts. However, the closes (in the black box) correspond to the low end of the tentative up trendlines - tentative while an up trend line is still uncertain or still being established. I would make more note of either the horizontal line from the low end of the chart gaps or a "line" of prior lows - whichever is present, and appropriate. I suggested, buying SPX calls at 1090 and I am looking for another opportunity to buy some more as close to 1075 as we get next week. It’s also possible we get another minor rally, followed by another downswing and so on, but not sink a whole lot lower than already seen, especially while closing prices are hugging the 21-day day moving average. S&P 500 (SPX) Weekly chart: I used this weekly chart in last night's market wrap for Option Investor and talked about the likelihood that the pattern outlined was that of a chart formation known as a Head and Shoulders bottom (sometimes called an inverse head and shoulders). I will provide a more in-depth explanation of this pattern for those who would like to know more about what it means in technical analysis and what it may be telling ups about a potential major trend reversal. I provide this explanation at the bottom of this column for those who want to read it. The recent rally has occurred from an oversold extreme on a weekly chart basis, as measured by the recent low reading on the 8-week stochastic. This indicator formula looks at where the index is relative to the highest high and lowest low of the prior two months. S&P 100 (OEX) Daily/Hourly charts: Buy zone for accumulation of OEX calls for the turnaround that I anticipating begins at 541-542 area and extends to 536 - rather than the exit/stop at 536 I suggested Thursday, would suggest risking to 529.50. But for those with deeper pockets, I would be willing to price pick up an added position as low as to the 522 area, if that level was re-tested again. I am painting broad strategy strokes here. The weekly oscillators show the same oversold extreme as the SPX. Dow Industrials 1/100 Index ($DJX.X) Daily/Hourly charts: I favor accumulation of longer-term DXJ call positions in the 101 area, extending down to 100. Rather than exit at 100, suggest further accumulation in this area, if reached. A close at or udder 99 would be an exit point for those who want to work with a certain stop point. Further positions could be taken on a "breakout" move above the key line of resistance at 102.2. If so, short-term traders could exit at 103.5 for a trade. Otherwise, I am holding out for a 105 objective. Nasdaq Composite Index ($COMPX) Daily/Hourly charts: Nasdaq is the high-risk party boy of the indices. Not that the rest do not have risk of your losing your premium, but the Nas is the wild child. If the emerging hourly up trendline does not indicate any meaningful support at the Friday close, look for support at 1652; then, if exceeded, in the low-1640 area - absent some major calamitous event. I'm talking always about "normal" market (bearish or bullish) influences. Momentum players could buy into, or additionally, on a decisive upside penetration of key near overhanging resistance at 1697. Next resistances are at: 1705, 1715 and 1730 - more major resistance comes in at the prior 1760 high. Nasdaq Composite Index ($COMPX) Weekly chart: Nasdaq has been reversing at its weekly down trendline, which comes into play next week at 1712. Needless to say an upside penetration of this resistance is needed to suggest that a major trend reversal was underway. Two other noteworthy aspects of the COMP weekly chart is the same head and shoulders bottom pattern, "outlined" and discussed for the S&P weekly chart. The low of 3 weeks ago came after completion of a 75% retracement, which is significant in that it suggested that a 100% retracement would not necessarily be seen - otherwise we would be looking at possible double bottom low rather than a head and shoulders bottom pattern. Finally, even on the longer term moving average (length: 13), I use on my weekly charts, this market is at an oversold extreme. Nasdaq 100 (NDX) Daily/Hourly charts: I'll do my commentary based on the QQQ chart below, but would note the (dashed blue) gap line at 1245 in NDX, which has been an area of support. 1234 is the recent low - buy any apparent reversal that comes in that area. 1285 is a key near resistance level and breakout point if pierced. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: Anyone who bought the 31 area per my suggestion, maintain a stop at 30.5 as you wish. I myself am inclined not to stop on long calls there, as I'm willing to accumulate a second half of a position if 29.5 was re-tested, my "worst case" scenario right now. 31.9-32 is key near resistance and potential breakout point, at least for a move to 33. 33.6, if cleared would be an important breakout move. Significant resistance starts at 34 and extends to 35. ADDENDUM - THE HEAD & SHOULDERS BOTTOM: There is no magic in this or any of the other patterns. In this pattern, first comes a low formed because selling dries up to some extent and buying comes in. A subsequent rally eventually attracts renewed selling and there is another decline to lower than before and investors get more bearish. Eventually, buyers come in again as they perceive value. There is another rally, but also in the end this one fails also - a bear market does not end quickly. However, this time this third low is approximately in the same area as the first bottom. At this juncture, the 3rd. bottom formation is showing the establishment of a "value" area for stocks and the stage is set for a more prolonged reversal, typically due to a basic change in the earnings potential related to stocks. There is a measuring technique that can be applied to a head and shoulders pattern. In H&S bottom pattern, a trendline is drawn through the top of the first rebound from the first cluster of lows (the left shoulder), which becomes the initial point of a "neckline". This line (neckline) then connects to the top of the second rally that develops from the lowest cluster of lows (the head). We then have at least two points to draw a line and that line has the relative position of the “neckline” of a human figure. Taking the price that represents the top of the (upside down) head, which is the lowest low and measuring the price on a vertical line where it intersects the neckline, provides a value. Add this value to the point where prices achieve an upside penetration of the neckline after the formation of the third cluster of lows (the right shoulder). This vertical measurement then provides a minimum objective on the upside. For example, if there was a move in 2 weeks above 1133 or above the neckline, this vertical measurement from the point where SPX penetrates the neckline, would suggest a minimum potential objective to around 1445 - approximately equal to a 50% retracement of the decline from the March '00 top. The measuring convention for a head and shoulders objective should not be taken as an absolute. This measuring rule implies a minimum objective only and once a trend develops the overriding principle is to stay with the trend as long as it continues. However, a significant value is provided by this measuring technique in that an initial price objective can be established. The second point regarding price objectives is that the actual upside or downside potential of these top or bottom formations may not be quite as much by using the "standard" technique described. Thomas Bulkowski in his “Encyclopedia of Chart Patterns” found that the most likely rise for head and shoulder bottoms, once the neckline was penetrated, was between 20 and 30%. Another aspect to the head and shoulders pattern is that it has been found to have one of the more predictable outcomes as patterns go. For example, Bulkowski found that 93% of the head and shoulders top formations he studied broke out to the downside (penetrated the neckline) once they had formed. This suggests as a trading strategy, that when the formation of the right shoulder is apparent, going long on formation of a H&S bottom and short in an instance of the H&S top pattern – and to not necessarily wait for a "confirming" penetration of the neckline. After the right shoulder has formed, if instead SPX started into a steep fall again (a new down leg) and the bottom of the "inverted" head was exceeded, it constitutes a pattern failure. A pattern failure means that the pattern failed to have the expected and common outcome in terms of a further price movement. Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** Editor's Plays ************** Old Favorite Revisited Several times in the past I have profiled this stock with good results. It is setting up for a high odds trade again. I have suggested several different strategies. Providian Calls PVN has traded as low as $2.00 back in November and as high as $8.49 in April. I profiled this stock as a rebound candidate in the $3.00 range and again around $5.00. After a significant move to near $8.50 it met with significant selling due to profit taking, market weakness and various other factors. After selling off to nearly $6.00 it is rebounding again. On Friday it was one of the few stocks to post a gain. I still think it has resistance at $8.50 but a break over that level would produce significant short covering. It is evident that PVN is going to survive and could even move back into its previous trading range well over $20. The play I am suggesting here requires time. Buying May options will not work. There could be another failure at $8.50 before it gathers enough speed to hurdle that barrier. This means you need to go farther out and probably use the $10 strike price. Use your own judgment. I profiled the Sept-$10 call at $.55 cents and the Jan-03 $10 call at $1.10. I like the January call because of the time. If we get a breakout over $8.50 the stock could run several dollars and once above $10 could draw serious short covering. The Sept $10 call for $.55 cents is more like gambling but the stakes are very low. This is a lottery play that will either expire worthless or go for 200% to 500% gain. Nobody knows. Another way to play this would be to sell the Jan-03 $15 put naked for the current bid of $7.20. ANY CLOSE over $7.85 for PVN at January expiration would result in a profit. A close over $15.00 would result in a full profit of $7.20 but you could be capped at that point. That is the most you can make. Want more gains? You could also sell the Jan-$10 put for the current ask of $2.95 and use the proceeds to buy twice as many Jan-$10 calls for the $1.10 shown above. This gets you into the trade for free and even puts a little cash into your account. If PVN closes over $10 in January your put expires worthless and the calls are worth the difference between $10 and the current stock price. If PVN was $15 your calls would be worth $5 each and if you bought two contracts for every put you sold then you would have a $10 per share profit and your cost was zero. You want to live dangerously? Sell the $15 put for the $7.20 ask and buy 6 $10 call contracts @ $1.10 for every put you sold. That would protect you from loss on the put as long as PVN closed over $10 in January. The value of your calls would offset any shortage on the put. If PVN closed at $15 the put would expire worthless and the calls would be worth $30 (6 x $5). Not a bad profit for a free trade! If PVN closed at $11 your put would cost you $4 to buy back but the calls would be worth $6 for a profit of $2. Your breakeven price is about $10.75. Anything over is a profit, anything under and you own the stock with a basis of $15. Now, your only challenge is deciding where PVN will close in January! It is rumored to be a buyout candidate as well. Disclosure: I own PVN stock and options at this time. *********************** Remember, these are all high risk plays and should only be made with 100% risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** Third Time's A Failure By Eric Utley They tried to ramp the market into the close for the third consecutive session late Friday, but couldn't muster the strength to do so. The whole idea seemed a bit too cute for me. But they tried nonetheless. There was a big battle that took place between the bulls and bears late Friday; between those wanting to be in cash over the three day weekend, and those wanting to be in the market for a potential relief rally next Tuesday morning. We saw a blip higher in the CBOE Market Volatility Index ($VIX.X), but nothing of significance. With the Dow Jones Industrial Average ($INDU) slipping by triple digits, and the S&P 500 (SPX.X) losing more than a percent, I would have expected that the VIX would've closed at least above 22. But it didn't. Heck, it didn't even trade the high during the day. But that's what we're left with, a complacent market. My sector scorecard was about as red as it gets. With the fractional exception of the Airline Index (XAL.X), everything that I track for this column was in negative territory. There were a couple of three percent plus dips in the technology sector thanks to the Semiconductor Index (SOX.X) and the Biotechnology Index (BTK.X). These two were the leaders of the Nasdaq not too long ago, so their deterioration during the last several weeks, I think, bodes poorly for the broader Nasdaq moving into the summer. But just how we get there remains to be seen. Next week is historically one of the most bullish weeks of the year as Memorial Day officially kicks off the summer season. So the deterioration that we've observed in some segments of the market, especially technology, may be temporarily overlooked if the historical trends take over. S&P commercials seemed to be betting along with the historical trends as the group reduced its net bearish position by about 5,000 contracts during the most recent reporting period. In contradiction to that movement, though, we saw another jump in the S&P small traders bullish position to just below that group's yearly high. Finally, and very much anecdotally, I noticed a few interesting numbers in the put/call ratios Friday. Normally I don't like to view the data from such a micro perspective. But I found the OEX put/call ratio -- the index in which the institutional crowd likes to play around -- finished at 1.00 Friday, or neutral. Meanwhile, the QQQ, where the retail crowd likes to hang out, put/call ratio finished Friday at 0.27. That's right, 0.27. Needless to say, the cubers are leaning bullish going over the weekend. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 11350 52-week Low : 8062 Current : 10104 Moving Averages: (Simple) 10-dma: 10211 50-dma: 10207 200-dma: 9898 S&P 500 ($SPX) 52-week High: 1316 52-week Low : 945 Current : 1084 Moving Averages: (Simple) 10-dma: 1091 50-dma: 1109 200-dma: 1118 Nasdaq-100 ($NDX) 52-week High: 2071 52-week Low : 1089 Current : 1253 Moving Averages: (Simple) 10-dma: 1285 50-dma: 1342 200-dma: 1452 Airline ($XAL) The XAL was the best performing index on my list Friday. The group finished 0.04 percent higher. Leaders to the upside included U.S. Airways (NYSE:U), UAL (NYSE:UAL), Northwest Airlines (NASDAQ:NWAC), AMR (NYSE:AMR), and Delta Airlines (NYSE:DAL). 52-week High: 152 52-week Low : 59 Current : 81 Moving Averages: (Simple) 10-dma: 82 50-dma: 95 200-dma: 93 Biotech ($BTK) What a reversal here. Maybe Thursday's move was, after all, not much more than short covering ahead of the Biogen (NASDAQ:BGEN) event. In any case, the BTK earned the worst performing sector spot Friday with its 3.57 percent giveback. Leading individual movers to the downside included Protein Design Labs (NASDAQ:PDLI), Millennium (NASDAQ:MLNM), Sepracor (NASDAQ:SEPR), and Genzyme (NASDAQ:GENZ). 52-week High: 676 52-week Low : 375 Current : 416 Moving Averages: (Simple) 10-dma: 413 50-dma: 456 200-dma: 509 ----------------------------------------------------------------- Market Volatility The VIX rebounded ahead of the holiday weekend, but I didn't see any meaningful fear build in the index. The slide was only a reaction to the weakness in stocks. The VXN, by my estimation, trades with a bit more fear still, which makes sense because of the horrible position in which the tech sector finds itself, fundamentally speaking of course. CBOE Market Volatility Index (VIX) - 21.28 +0.93 Nasdaq-100 Volatility Index (VXN) - 43.61 +0.41 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.82 300,464 245,610 Equity Only 0.59 257,679 152,740 OEX 1.00 12,617 12,627 QQQ 0.27 17,345 4,689 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 63 + 0 Bull Confirmed NASDAQ-100 40 - 1 Bull Correction DOW 67 + 0 Bear Correction S&P 500 64 + 0 Bull Confirmed S&P 100 66 + 0 Bear Correction Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 1.09 10-Day Arms Index 0.97 21-Day Arms Index 1.28 55-Day Arms Index 1.26 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when the do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals Advancers Decliners NYSE 1238 1896 NASDAQ 1250 2126 New Highs New Lows NYSE 90 16 NASDAQ 73 62 Volume (in millions) NYSE 888 NASDAQ 1,206 ----------------------------------------------------------------- Commitments Of Traders Report: 05/21/02 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 S&P commercials added more longs than shorts last week, resulting in an decrease in the group's net bearish position. Small traders did just the opposite for a net increase in their bullish positions. Small traders are less than 2,000 contracts away from their most bullish reading of the year. Commercials Long Short Net % Of OI 05/07/02 348,019 422,801 (74,782) (9.7%) 05/14/02 343,941 424,893 (80,952) (12.1%) 05/21/02 354,039 429,803 (75,764) (9.7%) Most bearish reading of the year: (111,956) - 3/6/01 Most bullish reading of the year: ( 36,481) - 10/16/01 Small Traders Long Short Net % of OI 05/07/02 154,664 59,583 95,081 44.4% 05/14/02 163,035 58,587 104,448 49.8% 05/21/02 164,964 58,950 106,014 47.3% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 107,702 - 3/26/02 NASDAQ-100 Nasdaq commercials grew slightly more bullish last week with a gain of 1,000 contracts to their net bullish position. Small traders on the other hand grew more bearish by adding to their existing chunk of shorts. Commercials Long Short Net % of OI 05/07/02 38,338 39,152 (814) (1.1%) 05/14/02 40,858 35,761 5,097 (5.5%) 05/21/02 51,448 45,375 6,073 (6.3%) Most bearish reading of the year: (15,521) - 3/13/01 Most bullish reading of the year: 7,774 - 12/21/01 Small Traders Long Short Net % of OI 05/07/02 13,229 13,161 68 0.3% 05/14/02 11,920 17,479 (5,559) 8.2% 05/21/02 12,567 19,899 (7,332) 22.6% Most bearish reading of the year: (9,877) - 12/21/01 Most bullish reading of the year: 8,460 - 3/13/01 DOW JONES INDUSTRIAL Dow commercials grew less bullish last week by reducing their long position and adding to their short position. Small traders remained flat in their actions. Commercials Long Short Net % of OI 05/07/02 19,967 14,045 5,922 17.4% 05/14/02 21,080 14,725 6,355 14.4% 05/21/02 20,173 15,317 4,856 13.7% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 05/07/02 5,124 9,831 (4,707) (31.5%) 05/14/02 4,930 10,899 (5,969) (25.2%) 05/21/02 3,661 9,585 (5,924) (44.7%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *************** ASK THE ANALYST *************** Another Goodbye By Eric Utley Late last December I thought my QCharts was acting up on me when it failed to retrieve a quote for the Insurance Sector Index, which traded on the CBOE. Later on in the day, after frustration mounted, I called the CBOE only to discover that the sector had ceased trading. The spokesperson added that the Chemical Sector Index had stopped trading as well. Wouldn't you know it, the CBOE did it again. This time, the exchanged stopped pricing the Retail Sector Index (RLX.X). It happened about two weeks ago. So don't blame QCharts for their poor data feed. There's no data to feed for the RLX anymore. For sector analysts like myself, the loss of an important consumer metric like the RLX is a pain. But to combat my loss, I've begun to track the daily fluctuations of several bellwethers, including Wal-Mart (NYSE:WMT), Home Depot (NYSE:HD), and Kohl's (NYSE:KSS), among of few others. It's my best solution for now. The point and figure charts that appear in this column were created using www.StockCharts.com. Please send your questions and suggestions to: Contact Support ---------------------------- Brocade (NASDAQ:BRCD) What's going on with BRCD? It seems like a good short to me if it breaks down. Thanks for the hard work. - William Thanks for the question and compliment, William. I've been shorting BRCD with a great deal of success over the last two months, as well as owning puts from time to time. For the purposes of disclosure, I have no position in BRCD at the time of publication. Call it lucky, but this stock has been incredibly easy to short over the last two months. It's been too easy, which always makes me nervous. There have obviously been some fundamental issues at play because a stock normally does not shed 10 points, or about 30 percent, in the space of a few months without some sort of shift in investor sentiment or change in its business. The company's last quarter was actually pretty strong, but I think investors began to bring into question the valuation of its shares after learning of management's future expectations for growth. And of course the blow-ups at the big box makers such as Sun Micro (NASDAQ:SUNW) and IBM (NYSE:IBM) exacerbated the valuation concerns. The company is expected to increase sales despite the weak tech spending environment, which I think is part of the reason that the stock traded so well earlier in the year. But at about 10 times last year's sales, the stock is most expensive. Its forward earnings multiple is still north of 70 even after the recent 30 percent clip. Even though there was a fundamentally driven bias in this trade, mine was purely technical. I suppose the fundamental work helped to increase conviction, but the reason for initiating the several positions was because of what I saw on the point and figure chart. Starting in February, I noticed that BRCD was being leaned on heavily at double tops as well as its bearish resistance line, which wasn't broken through Friday's session. The second test of bearish resistance gave me my first entry point into the stock. My second entry came through my hand charting of this stock because it's a component of the Nasdaa-100 (NDX.X), which I hand chart every night. Through March and April, I began to detect the formation of a bearish triangle, which was after the stock hit its current bearish price objective at the time of $22. The trade in early April up to the $28 level gave me my second entry into a bearish position, just before the bearish triangle was completed. Once that pattern was formed, I covered the second position, and began thinking longer term about the new bearish price objective of $15 created out of the bearish triangle. Stepping back, the stock had failed to break its bearish resistance line on two successive tests, followed by achieving its bearish price objective of $22, followed by forming a bearish triangle. At that point, which was in mid-April, I was comfortable with being short BRCD on any subsequent rally, which is what I've done up through the most recent relative high at $24. You see, each time the stock rallies just to below its bearish resistance line, I have had the good fortune of setting a tight stop that hasn't been triggered; risk has been too easy to define and manage. The most recent position was covered last Wednesday on the trade down to the double bottom to the $19.50 level. I'll be patiently waiting overhead at $23 for another try. BRCD - Daily ---------------------------- Merrill Lynch (NYSE:MER) After the announcement of the settlement, Merrill Lynch (MER) didn't rally very much. MER is back below where it was before the settlement was announced. I was wondering if it's a good buy or if to stay away from the stock. - Regards, Ashok Thanks for the question, Ashok. Merrill was tapped with a $100 million fine last week when they and N.Y. attorney general Elliot Spitzer reached an agreement. $48 million for New York, and another $52 for all other states. I think Komansky reached into petty cash to pay for the fine, and that's all I will say about that. Ashok made what I think is a very intelligent observation in that MER below where the announcement of the settlement was made. I think that reflects the poor conditions of the brokerage business, both the retail and IB sides. The seemingly bad news in the form of the $100 million had already been discounted into the stock, and those amateur shorts who hadn't already covered did so upon the announcement, leaving the stock to once again trade off of its business. Separately, there may be further discounting depending on how the civil cases start shaping up. Though I just wrote that the brokerage business is still tough, I am seeing signs of strengthening. But it's no in the names such as Merrill Lynch and Goldman Sachs (NYSE:GS). No, the strength that I'm seeing is in the smaller names like Jeffries (NYSE:JEF), Legg Mason (NYSE:LM), and Raymond James (NYSE:RJF). Pru, as in Prudential (NYSE:PRU), is another name that trades very well in the group, but that one comes with an insurance slant. So for what it's worth, I'm seeing some bullish things in the brokerage business, just not in the traditional Wall Street houses. Back to Merrill. Technically, I don't see much reason to get bullish on the stock other than the potential for an extended rebound after the test of the lower end of its descending channel depicted on the chart below. But then again, I don't know how smart it is to buy a stock in a downward trend. I'd rather wait to short it closer to resistance. MER - Daily ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. ************* COMING EVENTS ************* ================================================== Market Watch for the week of May 27th ================================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- None ------------------------- TUESDAY ------------------------------ BMO Bank Of Montreal Tue, May 28 -----N/A----- N/A DCI Donaldson Tue, May 28 After the Bell 0.45 PLL Pall Tue, May 28 After the Bell 0.20 PFP Premier Farnell Plc Tue, May 28 Before the Bell N/A TKA TELEKOM AUSTRIA AG Tue, May 28 -----N/A----- N/A VSL Videsh Sanchar Nigam Tue, May 28 Before the Bell N/A ----------------------- WEDNESDAY ----------------------------- LZB La-Z-Boy Wed, May 29 After the Bell 0.46 OOM MMO2 Wed, May 29 -----N/A----- N/A TOL Toll Brothers Wed, May 29 -----N/A----- 0.62 ------------------------- THURSDAY ----------------------------- CHS Chico`s FAS Thu, May 30 Before the Bell 0.43 COST Costco Wholesale Corp Thu, May 30 -----N/A----- 0.27 DG Dollar General Thu, May 30 After the Bell 0.13 OTE Hellenic Telecomm Thu, May 30 Before the Bell N/A MIK Michaels Stores Thu, May 30 -----N/A----- 0.20 NGG National Grid Group Thu, May 30 -----N/A----- N/A ------------------------- FRIDAY ------------------------------- PNY Piedmont Natural Gas Fri, May 31 -----N/A----- 1.24 ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable BKNW Bank of the Northwest 5:4 05/24 05/28 SU Suncor Energy 2:1 05/25 05/28 GG Goldcorp 2:1 05/28 05/29 CPG Chelsea Property 2:1 05/28 05/29 UCBI United Community Banks 2:1 05/28 05/29 COCO Corinthian Colleges 2:1 05/28 05/29 RYL Ryland Group 2:1 05/29 05/30 RYAN Ryans Family Steak 3:2 05/29 05/30 DBRN Dress Barn 2:1 05/30 05/31 APWR AstroPower, Inc 3:2 05/30 05/31 RNR RenaissanceRe 3:1 05/30 05/31 HHS Harte-Hanks Inc 3:2 05/30 05/31 CACB Cascade Bancorp 3:2 05/30 05/31 SRCL Stericycle Inc. 2:1 05/31 06/03 FBC Flagstar Bancorp 3:2 05/31 06/03 ALC Alltrista 2:1 05/31 06/03 PRSP Prosperity Bancshares 2:1 05/31 06/03 CNBC Center Bancorp 21:20 06/01 06/03 FDC First Data 2:1 06/03 06/04 SLFI Sterling Financial 5:4 06/03 06/04 AAON AAON Inc 3:2 06/04 06/05 FIC Fair, Isaac and Co 3:2 06/04 06/05 ESI Fair, Isaac and Co 2:1 06/05 06/06 GBTS Gateway Financial Hldngs 11:10 06/05 06/06 UPC Union Planters Corp 3:2 06/06 06/07 CPS ChoicePoint 4:3 06/06 06/07 GGG ChoicePoint 3:2 06/06 06/07 AWR American States Water 2:1 06/07 06/10 FOSL Fossil, Inc. 3:2 06/07 06/10 -------------------------- Economic Reports This Week -------------------------- With the earnings season essentially over, this week's focus will be on key economic reports: Tuesday's Consumer Confidence, Wednesday's Chicago Purchasing Managers Index and Friday's Productivity/Factory Orders reports. All of these will give us new insight into the health of the US economy. If consumers are feeling good and corporations are spending, look for the markets to applaud--loudly! ============================================================== -For- Monday, 05/27/02 ---------------- None Tuesday, 05/28/02 ----------------- Personal Income (BB) Apr Forecast: 0.3% Previous: 0.4% Personal Spending (BB) Apr Forecast: 0.7% Previous: 0.4% Existing Home Sales (DM) Apr Forecast: 5.35M Previous: 5.40M Consumer Confidence (DM) May Forecast: 110.0 Previous: 108.8 Wednesday, 05/29/02 ------------------- None Thursday, 05/30/02 ------------------ Initial Claims (BB) 05/25 Forecast: N/A Previous: 416K Chicago PMI (DM) May Forecast: 54.5 Previous: 54.7 Help-Wanted Index (DM) Apr Forecast: N/A Previous: 46 Friday, 05/31/02 ---------------- Productivity-Rev. (BB) Q1 Forecast: 8.6% Previous: 8.6% Mich Sentiment-Rev. (DM) May Forecast: 96.0 Previous: 96.0 Factory Orders (DM) Apr Forecast: 0.3% Previous: 0.8% Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 05-26-2002 Sunday 2 of 5 ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************** INDEX TRADER GAMEPLANS ********************** THE SECTOR BEAT - 5/26 by Leigh Stevens NOTE: I WILL BE OUT OF THE OFFICE UNTIL THURSDAY (5/30). ON AND AFTER MY RETURN I WILL CONTINUE THE INITIAL ASSESSEMENTS AND UPDATES FOR THE SECTORS THAT I HAVE NOT WRITTEN ON. HIGHER ON THE DAY ON Friday - Not many in green! DOWN ON THE DAY on Friday - SECTOR HIGHLIGHT OF THE DAY - Transportation Average; Dow Jones ($TRAN) STOCKS: ABF; ALEX; AMR; BNI; CNF; CSX; DAL; FDX; GMT; JBHT; LUV; NSC; NWAC; R; ROAD; U; UAL; UNP; USFC; YELL The Dow Transportation Average or Dow Transports ($TRAN) has been in a sideways basing pattern since early-February, as defined by the lows that have been consistently falling in the 2650 area, at and above its 200-day moving average. The triangle pattern that formed in the early-March to mid-May timeframe indicated a further consolidation. This in turn was followed by a bullish breakout above its up trendline (dashed line). Such a breakout out of this triangle is bullish and suggests that the average may begin to work higher. At a minimum TRAN ought to be able to rebound to the high end of its 2650-3050 trading range. First, the transports would need to clear its prior upswing high at 2883. Stocks/calls in this group could be looked at for bullish potential and one of more of them - and, a "basket" of these stocks offer better diversification - purchased around current levels. The more bullish case based on a Point & Figure (P&F) horizontal count, based on the lengthily period of sideways movement, would suggest an upside objective to the 3200 area. NEW SECTOR TRADER FORMAT - I'M GOING TO LEAVE UP THIS EXPLANATION THIS WEEK - OBVIOUSLY, YOU CAN SKIP PAST IT IF YOU KNOW ABOUT THE SECTOR TRADER CHANGES ALREADY. I will be starting a daily chart/technical review of all the major popular sectors. Sectors will not be updated every day IF there is NO significant CHANGE FROM the LAST update. If there is a chart, with technical patterns and/or indicators that may be of particular interest, I will include the chart on the sector index. Over time, I will be listing the stocks that comprise each sector, at least by symbol. In addition, if there is a complimentary iShare or HOLDR that represents the sector, its symbol and name will be noted also [NOTE: COMING IN NEXT FEW DAYS], although it will take me some time to pull all this information together. The advantage of a HOLDR/iShares is that you have immediate diversification as the shares represent ownership in a basket of stocks in that sector. If you enter a trade in only one sector stock or its option, within the sector, that particular stock may not perform in line with the Index in question; e.g., there is a broker downgrade on the stock, but not others in the sector. Options do, of course, offer the benefit and attraction of offering a leveraged and limited risk (long options) means to participate in a sector's trend. However, the ideal means to play individual stocks is to select at least 3 of the group for the sector play, using representative stocks in that group. You'll also note that there are two Indexes that are not sectors per se - the Amex Composite Index and the Russell 2000. One of the popular investment "themes" this year, is buying the small and mid cap stocks. These two indexes are composed of many of these companies. As such, they are of interest to many traders and investors. SECTOR REVIEW - * COMPLETION OF THESE REVIEWS OVER COMING DAYS * Airline Index ($XAL.X) STOCKS: ALK; AMR; AWA; CAL; DAL; FRNT; KLM; LUV; NWAC; U; UAL Still in a downtrend, well under its 50 and 200-day moving averages. However, XAL has been recently rallying from recent lows in 79 area, not far from early May bottom at 77.6. The index wouldn't break out above its major down trendline before 89. Major support looks like 70 area, but the Airline group could be bottoming near the prior 5/13 low at 77.6. XAL was fully oversold based on 14-day RSI on that date, but reading is up a bit from this extreme. LAST UPDATE: 5/26 Amex Composite Index ($XAX.X) The small cap stocks so predominating in the Amex, as a group, had a minor correction from recent highs and from an overbought oscillator reading. Recent rebound has put XAX back to a new all intraday and closing high. XAX's up trendline intersects at 952 currently. Only a close under this level would suggest that the strong trend was reversing. LAST UPDATE: 5/26 Bank Index ($BKX.X) STOCKS: BAC; BBT; BK; C; CMA; FBF; FITB; GDW; JPM; KEY; KRB; MEL; NCC; NTRS; ONE; PNC; SOTR; STI; STT; USB; WB; WFC; WM; ZION The bank index has made at least a temporary double top in the 916 area - closing penetration of this prior top, and subsequent support developing in this area, would suggest a new up leg. If BKK fell under its up trendline at 880 on closing basis, it would be a bearish signal that the up trend had reversed. If so, significant support lies in low 860 area. LAST UPDATE: 5/23 Biotechnology Index ($BTK.X) STOCKS: ABGX; ADRX; AFFX; AMGN; BGEN; CELG; CEPH; CHIR; CRA; DNA; ENZN; GENZ; GILD; HGSI; ICOS; IDPH; IMCL; IMNX; INCY; MEDI; MLNM; MYGN; PDLI; TARO; TEVA; VRTX; XOMA BTK has been in pronounced downtrend, which appears to have reversed at the early-May lows in the 380 area. A continued rally from this point suggests that index can work higher as long as we continue to see a pattern of higher (up) swing highs and higher (down) swing lows. Emerging up trend is called into question on a close below the developing up trendline at 399. Next key technical resistance area is 449-450, the area of several prior lows and the intersection of daily down trendline. A close above 449-450 would be a good indication that the trend has reversed higher. Further resistance then comes in at the top of the downtrend channel at 475. Suggested buy of Biotech Holdr's (BBH) at 101.50 on 5/24 open; recommended initial stop/exit point at 92.5; initial objective: 113; longer-term objective: 127, back to area of mid-March highs. LAST UPDATE: 5/26 Computer Technology Index ($XCI.X) STOCKS: to be listed Remains in a downtrend; May rally recently reversed at 50-day moving average and from an overbought reading on the daily oscillators; e.g., 4-day RSI. Key resistance is at 672, then 682. Close over these levels would turn the trend up. Early-May lows in the 580 area now looks like major support as current levels are well above this area. LAST UPDATE: 5/23 Computer Boxmaker Index ($BMX.X) STOCKS: AAPL; CPQ; DELL; GTW; HWP; IBM; SNE; SUNW; UIS; VRTS Boxmakers sector, an unglamorous term for PC manufacturers, had a mid-May rally right to its down trendline at it's 50-day moving average, where BMX reversed - this was also area of its 50-day moving average. Current downtrend reverses with a close above 96. Break of near support at 91, on a closing basis, suggests a possible further retreat to major support in the 83-85 area. LAST UPDATE: 5/23 Cyclical Index; Morgan Stanley; ($CYC.X) STOCKS: AA; C; CAT; CSX; DCN; DD; DE; DOW; ETN; F; FDX; GP; GT; HON; HWP; IP; IR; JCI; KRI; MAS; MMM; MOT; PBI; PD; PPG; PTV; R; S; UTX; WHR; X The cyclical index has been locked in a 595-552 trading range since early- March, with current levels close to the high end of this range. Interestingly, the recent advance did not hit an overbought extreme on the daily oscillators, so the sideways trade could be setting up for an eventual breakout when/if the economy really gets going. A breakout above 395 on a closing basis, with subsequent ability to hold this level on pullbacks, would suggest that another up leg was developing in CYC. A close below 564, at its up trendline, would reverse the trend down. LAST UPDATE: 5/23 Defense Index; Amex ($DFI.X) STOCKS: ATK; BA; COL; DRS; EASI; EDO; ERJ; ESL; FLIR; GD; INVN; ITT; LLL; LMT; NOC; OSIS; RTN; SSSS; TDY; TTN; UIC The Defense sector, a very strong performer in the January to May timeframe, formed a May top after repeated failures to get through resistance in the 680 area - retreat from the top area was accompanied by the a downside break of the Jan-May up trendline. The last rally to this area occurred on less relative strength, forming a classic price/RSI divergence. Resistance at the previously broken up trendline is at 673 currently, not far under the major 680 resistance. Am watching to see if the 50-day moving average acts as support beyond today. Downside possibilities for a pullback in DFI may lie either in the 615 or 595 areas, representing the 38% and 50% retracements, respectively. LAST UPDATE: 5/23 Disk Drive Index ($DDX.X) Fiber Optics Index ($FOP.X) Financial Index; NYSE ($NF.X) Forest & Paper Products Sector Index ($FPP.X) Gold & Silver Sector Index ($XAU.X) STOCKS: ABX; AEM; AU; FCX; GOLD; HGMCY; MDG; NEM; PD; PDG; SIL XAU continues to accelerate to the upside, but may find near resistance at the top end of its steep uptrend channel at around 90. My longer-term objective is 100 however. Near support looks like 80, with major support at 70. If you want to buy into this sector it is high risk, although gold bullion has a possible per ounce target to $340-345, maybe 350. The question is how much of the potential further price rise in gold is priced into the XAU stocks already. LAST UPDATE: 5/23 Health Providers Index; Morgan Stanley ($RXH.X) Healthcare Index; Morgan Stanley ($HMO.X) Key near support at 594 is at the up trendline, which is close at hand - recent lows are right on/at this line. If there is no rebound from its up trendline, there may be some further weakness that would take HMO down to the 580 area, which represents the 38% retracement level and is a common "minimal" retracement in a strong uptrend like this one. Sometimes, in a very strong trend, there will only be a 25% retracement, or a bit less, such as seen with this index. LAST UPDATE: 5/26 ** Suggested basket of 3 HMO stocks - PacifiCare Health Systems (PHSY) at 23.5-24.7. Stop/exit: 23.3 Wellpoint Health Networks (WLP) - Entry at 72.00, then at 70. Stop/exit point: 65 Additional buy suggested at 66. Humana (HUM) - Entry suggested at 15.60 & 15.00-15.15. HOLD only. Stop/exit point: 13.2 ** Other HMO stocks suggested ** Oxford Health Plans (OHP) - Buy stock/calls at 42 Unitedhealth Group Inc. (UNH) - Buy stock/calls at 80.50 Aetna (AET) - Buy at 44.35 High Tech Index; Morgan Stanley ($MSH.X) Internet Index; CBOE ($INX.X) Natural Gas Index ($XNG) Networking Index ($NWX.X) Oil Index; CBOE ($OIX.X) Oil Service Sector Index ($OSX.X) Pharmaceutical Index ($DRG.X) Retail Index; S&P - CBOE ($RLX.X) Russell 2000 Index ($RUT.X) Securities Broker Dealer Index ($XBD.X) Semiconductor Sector Index ($SOX.X) Software Index; Goldman Sachs ($GSO.X) Telecoms Index; No. American ($XTC.X) Transportation Average; Dow Jones ($TRAN) STOCKS: ABF; ALEX; AMR; BNI; CNF; CSX; DAL; FDX; GMT; JBHT; LUV; NSC; NWAC; R; ROAD; U; UAL; UNP; USFC; YELL ** SEE SECTOR HIGHLIGHT OF THE DAY ** Utility Sector Index ($UTY.X) Wireless Telecom Sector Index ($YLS.X) NOTE: RISK to REWARD guidelines - Determining an objective is important, even if it is a moving target, as this is the reward potential. Determining reward potential is critical to establishing whether a stop that makes “sense” (e.g., a sell stop that was placed under a key support level) would, if triggered, result in a dollar loss that is in proportion to profit potential; e.g., 1/3 of it. (On occasion, when the purchase price of call or put is equal to 1/3 or less of the estimated reward potential, there may not be a specific exit suggestion, as the cost of the option is equal to the amount that is being risked.) Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thu Week MMM 127.95 -1.83 -1.26 1.18 0.95 -2.12 Entry point HET 48.80 -0.52 -0.44 -0.40 1.15 -0.76 Dropped, fail TEVA 66.80 2.58 0.21 0.66 0.98 4.20 Court win!!! BAC 76.14 -1.10 -0.81 0.44 1.22 -0.76 Prime pullback ERTS 63.81 0.20 -2.30 1.60 1.75 0.10 Leading tech QLGC 47.80 -1.41 -1.69 -0.40 0.30 -4.02 Dropped, stop AOL 18.97 -0.60 -0.80 -0.03 0.49 -1.01 Needs market SIMG 9.99 -0.25 0.67 -0.33 0.25 -0.26 Entry point NOVN 24.37 1.22 0.96 0.20 0.61 3.88 No news rally RYL 114.10 -0.14 -2.53 0.32 2.94 2.11 Rally bound SNPS 52.70 -1.26 -0.23 0.25 1.12 0.31 New, wedging ADBE 37.67 -2.04 -1.81 -0.21 0.17 -3.33 New, rebound? CI 104.81 -0.56 -2.23 1.25 1.15 0.27 New, primed PUTS RE 63.83 -0.33 -0.63 -0.53 1.45 0.13 Dropped, pop MU 23.36 -0.55 -0.86 -0.05 0.75 -1.65 Dropped, book TTI 25.50 0.19 -0.44 1.02 -0.42 -0.40 Broke support HB 60.42 -0.31 -0.84 -0.25 0.82 -0.72 Trending down GS 78.19 -0.13 -1.04 -1.00 0.97 -2.31 Ready to roll BRCM 23.52 -1.03 -2.02 0.42 -0.21 -3.78 Sinking more PLAB 23.96 -0.45 -1.14 -0.21 -0.95 -3.44 Lower lows COHU 24.00 0.37 -0.92 0.65 -0.49 -1.80 New, break ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* SNPS - Synopsis, Inc. $52.70 (+0.31 last week) See details in play list Put Play of the Day: ******************** COHU - Cohu Inc. $24.00 (-1.80 last week) See details in play list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ HET $48.80 (-0.76) The broader market is holding back HET's rally attempt, and that has us worried. The stock couldn't get above the $50 short term resistance level during its most recent try, which may indicate that another rollover is around the corner. We'll look to exit plays next week on any bounce ahead of a potential relatively lower high. QLGC $47.80 (-4.02) Despite the bullish picture painted on the PnF chart, QLGC just couldn't get any bullish action going last week. While this looks like just normal consolidation, we are sticking with our discipline and dropping the play tonight, given the close below our $48 stop on Friday. The stock could rebound on Tuesday or continue falling to fill in the gap from early May, but that's what stops are for is to protect us from just hanging on to a position, hoping that it will come back. According to the PnF chart, QLGC should still make a strong bullish candidate. If you're going to play it, wait for price to stabilize and get back over $48. As for us, we're going to devote our attention to healthier plays. PUTS ^^^^ RE $63.83 (+0.13) RE spiked higher on no news last Friday. The move higher was a short covering burst of buying, which put RE above its 10-dma for the first time in about three weeks. The move could signal a reversal, so we're looking to cut losses next week upon a filling of the gap higher from Friday morning. MU $23.36 (-1.65) We've gotten a nice little slide out of MU over the past couple weeks, but we're concerned that the tide is about to change. Even with the SOX dipping below the $500 level on Friday and posting a more than 3% decline, MU failed to dip below support defined by its lows over the past 3 days near $23. Add in the fact that the SOX looks like it is due for a bounce, and we'll take this opportunity to close out our MU play with a gain. *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 05-26-2002 Sunday 3 of 5 ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** NEW CALL PLAYS ************** CI - CIGNA Corp. $104.81 (+0.27 last week) CIGNA Corporation and its subsidiaries are an investor-owned employee benefits organizations in the United States. Its subsidiaries are major providers of employee benefits offered through the workplace, including health care products and services, group life, accident and disability insurance, retirement products and services and investment management. CIGNA's operating divisions include Employee Health Care, Life and Disability Benefits, CIGNA Group Insurance, Employee Retirement Benefits and Investment Services, and International Life, Health and Employee Benefits. While the broader health care sector continues to languish, such as pharmaceuticals and biotechnology, other pockets of the sector are doing extremely well. The HMO stocks are among the best performing group of stocks in the health care group. The demographic trends in the U.S. are playing into the strength of the group, as well as the distaste left by the struggles in the drugs and biotechs. One stock in the group that is cheap at current levels is CI. It trades for only about 13 times this year's earnings, which is well below the company's historical valuation. Part of the reason for the discount at which the stock trades is due to the subpoena issued by the Justice Department for records into marketing practices. The news of the subpoena caused a drop in the stock, but investors are beginning to shake off those fears as the stock is trending towards a breakout. The stock is forming an ascending wedge with a top in place just above Friday's close at the $105 level. The strengthening pattern of relatively higher lows should lead to a breakout in the coming days. Watch for the move above the overhead congestion by a breakout above the $106 level on heavy intraday volume. Those who prefer to enter near support can watch for a pullback early in next week's trading near the $103 level on lighter intraday volume. Our stop is initially in place at the $101 level. BUY CALL JUN-100 CI-FT OI= 41 at $6.50 SL=4.00 BUY CALL JUN-105*CI-FA OI=156 at $3.30 SL=1.75 BUY CALL JUN-110 CI-FB OI=398 at $1.30 SL=0.75 BUY CALL JUL-105 CI-GA OI=404 at $4.50 SL=2.25 Average Daily Volume = 834 K ADBE – Adobe Systems $37.67 (-3.43 last week) A long-time leader in desktop publishing software, ADBE provides graphic design, publishing, and imaging software for Web and print production. Offering a line of application software products for creating, distributing, and managing information of all types, the company generates nearly 75% of sales through publishing software products such as Photoshop, Illustrator, and PageMaker. Its Acrobat Reader, which uses portable document format (PDF) is popping up all over the Internet, as businesses shift from print to digital communications. In addition, ADBE licenses its industry standard technologies to major hardware manufacturers, software developers, and service providers, as well as offering integrated software solutions to businesses of all sizes. Have you noticed the incredible weakness in the Software sector (GSO.X) in recent weeks? The index is still trading amazingly close to its September lows and showing very little participation in the brief rally attempts in the Technology sector. In the face of this depressing weakness, ADBE is a shining beacon of hope. The stock has been holding up remarkably well in light of the sector weakness and is consistently finding support near the $36 level on pullbacks. In contrast to many stocks in the Software sector, ADBE is above its 200-dma ($34.42) and has remained so for the past 3 months. The breakout over the $41 level a couple weeks ago indicates that the stock wants to work higher and it is notable that even with the broad market weakness on Friday, the stock managed to post a 1.5% gain. While there is no doubt that we're gaming a bullish play in a weak sector, we're looking for a rebound in the GSO to help ADBE to once again push to fresh post-9/11 highs. Given the weakness of the GSO, this is a higher risk play, but we're looking to mitigate that risk with a tight stop, just below the recent lows. Intraday dips near the $36 level will provide the best entries at this time, with stops initially placed at the $35 level. As an added bonus, we could see the stock see some buying interest ahead of the company's earnings report, due out on June 13th. BUY CALL JUN-35 AEQ-FG OI=2178 at $4.20 SL=2.50 BUY CALL JUN-40*AEQ-FH OI=3854 at $1.35 SL=0.75 BUY CALL JUL-35 AEQ-GJ OI=1475 at $4.80 SL=3.00 BUY CALL JUL-40 AEQ-GK OI=4099 at $2.20 SL=1.00 BUY CALL JUL-45 AEQ-GL OI=3327 at $0.85 SL=0.25 Average Daily Volume = 3.71 mln SNPS - Synopsis, Inc. $52.70 (+0.31 last week) Synopsis is a supplier of electronic design automation software to the global electronics industry. The company's products are used by designers of integrated circuits (ICs), including system-on-a-chip ICs, and the electronic products (such as computers, cell phones, and internet routers) that use such ICs to automate significant portions of their chip design process. SNPS' products offer its customers the opportunity to design ICs that are optimized for speed, area, power consumption and production cost, while reducing overall design time. Two of the weakest sectors of the market lately have been Software and Semiconductors, so it may come as a surprise that we're looking bullish on a stock that is tied to both areas of Technology. But when you find a compelling trend in place, sometimes it pays to take a risk. As a Software company that services the Semiconductor market, SNPS normally responds well to bullish trends in these areas of the market. The fact that SNPS has been trading well over the past 3 weeks while both the Software (GSO.X) and Semiconductor (SOX.X) sectors have been weak is an encouraging sign. Although SNPS had been caught in a trend of lower highs and lower lows since the first of the year, that trend appears to have been decisively broken last week. The stock moved right up to the descending trendline ($53) just over a week ago and fell back, only to rally strongly over the past 3 days, closing over that trendline for the first time in 5 months on Friday. Only time will tell if this breakout is real and there is some formidable resistance to deal with between $54-55. But if the SOX and GSO can get some positive momentum going, that should propel the stock through near-term resistance and give the bulls a shot at challenging the longer-term descending trendline at $57.50. Adding another bullish catalyst to the mix, SNPS is set to announce earnings on June 4th, so we might just get some bullish action heading into the report. Use bounces from intraday support at $51-52 or even as low as $50 to initiate new positions ahead of the next run at the $55 resistance level. We are initiating coverage with a rather wide stop at $49.50. BUY CALL JUN-50 YPQ-FJ OI=1524 at $4.30 SL=2.75 BUY CALL JUN-55*YPQ-FK OI= 892 at $1.50 SL=0.75 BUY CALL JUL-55 YPQ-GK OI= 6 at $2.65 SL=1.25 BUY CALL JUL-60 YPQ-GL OI= 508 at $1.05 SL=0.50 Average Daily Volume = 1.27 mln ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ****************** CURRENT CALL PLAYS ****************** BAC – Bank of America Corp. $76.14 (-0.76 last week) Providing a diversified range of banking and certain non-banking financial products and services, BAC's operations consist of Consumer Banking, Commercial Banking, Global Corporate and Investment Banking, and Principal Investing and Asset Management. Consumer Banking targets individuals and small businesses, while Commercial Banking targets businesses with annual revenues up to $500 million. Global Corporate and Investment Banking provides investment banking, trade finance, treasury management, leasing and financial advisory services. Principal Investing includes direct equity investments in businesses and general partnership funds, while the Asset Management businesses are split into three branches; Private Bank, Banc of America Capital Management and Banc of America Investment Services. The bullish close on Thursday had shares of BAC moving north again on Friday morning, but the acute lack of buying brought the initial upward surge to an abrupt end before the end of the first hour. Investors didn't want to go into the weekend long and that sentiment had the stock in a long slow downward drift for the majority of the day, with the stock ending at its low. BAC is still in its ascending trend after finding support at the trendline near $75 on Wednesday. With daily Stochastics now pushing north in bullish fashion and the tendency of the week after Memorial Day to be bullish, we're looking for BAC to challenge its all-time highs of last week in rather short order. The ascending trendline has now inches up to the $75.75 level, which just happened to provide some intraday support last week. Consider new positions on a dip and bounce in this area. Otherwise, wait for the bulls to prove their intentions by pushing BAC through its all-time highs near $77 (actually wait for a move through $77.25) before playing. Look for renewed buying in the Banking index (BKX.X) to help fuel the bulls in BAC. Our stop remains at $74.50. BUY CALL JUN-75*BAC-FO OI=11441 at $2.25 SL=1.00 BUY CALL JUN-80 BAC-FP OI= 4947 at $0.35 SL=0.00 BUY CALL JUL-75 BAC-GO OI= 330 at $3.10 SL=1.50 BUY CALL JUL-80 BAC-GP OI= 1229 at $0.95 SL=0.50 BUY CALL AUG-80 BAC-HP OI= 6923 at $1.50 SL=0.75 Average Daily Volume = 5.77 mln ERTS – Electronic Arts $63.81 (+0.10 last week) ERTS creates, markets and distributes interactive entertainment software for a variety of hardware platforms, including Sony's PlayStation 2, the PC, Nintendo GameCube and the recently launched Xbox. The company's EA.com business segment is engaged in the creation, marketing and distribution of entertainment software which can be played or sold online, as well as the ongoing management of subscriptions of online games and Website advertising. Conditions appear to be improving for makers of video game software for Microsoft's Xbox and Sony's Playstation 2. Microsoft and Sony have recently announced cuts in price for the game units and this is likely to translate into increased selling volumes for the makers of the software games. Investors seem to be grasping that concept from the look of ERTS' price chart as the stock managed a breakout over the $64 resistance level on Thursday. Unfortunately, there wasn't enough buying interest ahead of the long Holiday weekend to sustain the stock's momentum and it suffered a bit of weakness on Friday. That weakness looks like it is just setting us up for another entry point before the bulls really get serious and take aim on the stock's all-time highs near $67. Along with the positive trend in price over the past 2 weeks in ERTS, the Software sector (GSO.X) appears to be trying to put in a bottom near the $124 support level. Note that a print of $65 will generate a new double-top breakout on the PnF chart and that should clear the way for a run towards the $67 level. The current PnF bullish price objective is $79, so once clear of resistance the stock could really get moving. Use the current weakness in ERTS to initiate new positions on a rebound from support in the $62-63 area or else wait for the confirmation of a volume-backed rebound through the $65 level before playing. Our stop remains in place at $61, just below last Tuesday's intraday lows. BUY CALL JUN-60 EZQ-FL OI=2328 at $5.30 SL=3.25 BUY CALL JUN-65*EZQ-FM OI=3534 at $2.20 SL=1.25 BUY CALL JUL-65 EZQ-GM OI= 497 at $3.60 SL=1.75 BUY CALL JUL-70 EZQ-GN OI= 305 at $1.75 SL=1.00 Average Daily Volume = 2.92 mln MMM – Minnesota Mining and Manufacturing $127.95 (-2.12 last week) Commonly known as the maker of the ubiquitous, adhesive-backed Post-It Notes, MMM is also a leading manufacturer of a variety of industrial, consumer, and medical products. Reflective sheeting on highway signs, respirators, spill-control sorbents, and Thinsulate brand insulations are just some of the company's industrial products. MMM also makes microbiology products, making it easier for food processors to test for the microbiological quality of food. After dipping back to support early in the week, the DOW spent the majority of the week marking time, waiting for the next catalyst to arrive that can push it through near-term resistance near 10,350. As the week drew to a close, the index settled in right around the 10,100 support level, with buyers unwilling to step into new positions ahead of the long Holiday weekend. This dynamic is largely responsible for the lackluster trade in shares of MMM throughout the week. While the stock came right down to strong support in the area of $126 early in the week, the rebound has been rather tepid, reflecting investor nervousness. But the breakout above the $127 level is still intact, with the 6-week ascending trendline now rising to the $127 level. With the week after Memorial Day being historically bullish, we're looking for MMM to lead the DOW up to and through resistance in the week ahead. MMM continues to be one of the best performing DOW stocks and until the ascending trend is broken, dips continue to provide attractive entry points. Recall that the vertical count from the PnF chart is pointing to a bullish price objective of $140, and once the stock is clear of near term resistance it could really get moving. We're currently looking for dips to the $127 level to provide the best entry points. Traders that want to see the stock breakout first will need to wait for MMM to top the $130.75 level (just above the recent intraday high of $130.60) before taking a position. Stops remain at $126. BUY CALL JUN-125 MMM-FE OI=1312 at $5.20 SL=3.25 BUY CALL JUN-130*MMM-FF OI=2874 at $2.05 SL=1.00 BUY CALL JUL-130 MMM-GF OI=1430 at $3.70 SL=1.75 BUY CALL JUL-135 MMM-GG OI=1576 at $1.75 SL=1.00 Average Daily Volume = 1.88 mln RYL – The Ryland Group $114.10 (+2.11 last week) The Ryland Group is a homebuilder and mortgage-finance company that has built more than 175,000 homes. Additionally, the Ryland Mortgage Company (RMC) has provided mortgage financing and related services for more than 155,000 homebuyers. Currently, Ryland homes are available in more than 260 communities in 21 markets across the United States. Homebuilding stocks got a shot in the arm on Friday morning with the better than expected New Home Sales report which once again managed a strong showing. Rather than the expected 885K new sales for the month of April, the actual report showed 915K, 3.4% ahead of expectations. That sent the buyers scrambling in the Home Builder stocks and despite broad-based weakness throughout the broad markets, the Dow Jones Home Builders index ($DJUSHB) managed another solid performance, up 1.6%. Shares of RYL performed rather well throughout the day, although after the initial push higher, the stock essentially meandered sideways, given the lack of buying interest in anything ahead of the long weekend. the DJUSHB and RYL will likely need to see some renewed strength in the broad market if the bullish action is going to continue, but with the daily Stochastics now solidly bullish, we like the stock's prospects over the week ahead. Intraday pullbacks to the $112 or even $110 level can be used for initiating new positions ahead of the next breakout move. That's right, RYL is just a short-distance away from pushing through the $116 resistance level and testing its all time highs just below $118. Momentum traders will want to see a print at $118 (creating a triple-top Buy signal on the PnF chart) along with the $DJUSHB once again moving through the $388 resistance level before initiating new plays. Raise stops to $108.25 this weekend. BUY CALL JUN-110 RYL-FB OI= 338 at $7.50 SL=5.25 BUY CALL JUN-115*RYL-FC OI= 933 at $4.60 SL=2.75 BUY CALL JUN-120 RYL-FD OI= 281 at $2.40 SL=1.25 BUY CALL JUL-115 RYL-GC OI=1142 at $7.80 SL=5.50 BUY CALL JUL-120 RYL-GD OI= 38 at $5.70 SL=3.75 Average Daily Volume = 665 K TEVA - Teva Pharmaceuticals $66.80 (+4.20 last week) Teva Pharmaceutical Industries Ltd. is a fully integrated global pharmaceutical company producing drugs in all major therapeutic categories. In the area of proprietary drugs, Teva has focused on products for central nervous system disorders, primarily the development of Teva's first globally marketed branded drug, Copaxone, a treatment for relapsing-remitting multiple sclerosis. Teva also possesses significant manufacturing operations for active pharmaceutical ingredients (API). Teva Pharmaceuticals USA, Inc., Teva's principal United States subsidiary, is a generic drug company in the United States. Late Thursday night, a U.S. judge invalidated the patents of Glaxo Smith Kline's (NYSE:GSK) antibiotic Augmentin, which opened the doors for generic competition. The company responded by saying that its three patents expire next month, July, and in December, and that it will appeal the ruling by the judge. The ruling was a major victory for the generic drug makers as the global annual sales of the drug reached $2 billion. TEVA is one of the generic drug makers that stands to reap huge rewards from the ruling. In response to the win in the courts, AG Edwards upgraded shares of TEVA from a hold rating to a buy investment rating. The news caused a gap higher opening in the stock last Friday at the $67.81 level, then the stock raced past the $68 level in early morning trade. Certainly the trade higher this morning after the news was out of the bag could have offered traders riding the recent trend higher a good chance to book profits on partial gains, if not full positions. The stock's reversal into the close of trading signals that the move higher this week was of the buy on the rumor, sell on the news variety. With the news out, some consolidation may be in order. But thereafter, we'll look for a rebound and resumption of the trend higher. Watch for a pullback then a bounce from the $65 to $66 support area early next week. Confirm lighter volume on the way back down as profit taking, then watch for an intraday bounce from support for a new entry. BUY CALL JUN-65*TVQ-FM OI=1619 at $3.10 SL=1.75 BUY CALL JUN-70 TVQ-FN OI= 500 at $0.80 SL=0.25 BUY CALL JUL-65 TVQ-GM OI= 115 at $4.00 SL=2.00 BUY CALL JUL-70 TVQ-GN OI= 622 at $1.55 SL=0.75 Average Daily Volume = 910 K AOL - AOL Time Warner $18.97 (-1.01 last week) AOL Time Warner Inc. is a fully integrated, Internet-powered media and communications company. The Company was formed in connection with the merger of America Online, Inc. (America Online) and Time Warner Inc. (Time Warner), which was consummated on January 11, 2001. America Online and Time Warner are wholly owned subsidiaries of AOL Time Warner. AOL announced a minor reshuffling of management last Friday, headed by the new chief Richard Parsons. The company said that it was placing the lobbying and technology policies under the direct control of the new chief executive officer, and that the company's global chief technology officer will begin reporting directly to Parsons. The news didn't spark a short term rally in the stock, but it did signal that the new leader of the company is taking strides to get the stock back on track. Over the short term, though, the direction of the broader market will determine the path of AOL. Fortunately next week is historically bullish, and AOL is a perfect stock for playing such a historical trend. The stock is a big institutional favorite and tends to track the major averages very closely. So a good week for the market next week should translate into a good week for AOL. Technically the stock has been attracting buyers at the 10-dma, which now sits just below market at the $18.82 level. The stock bounced around that level last Friday, but managed to close above it for the third consecutive day, revealing that the buyers are lower and willing to support the stock during pullbacks. With strength in the broader market next week, those buyers should gain conviction. If so, look for a high volume breakout above the $20 level in an advancing broader market. BUY CALL JUN-17*AOL-FW OI=15172 at $1.95 SL=1.00 BUY CALL JUN-20 AOL-FD OI=49905 at $0.55 SL=0.25 BUY CALL JUL-17 AOL-GW OI= 4849 at $2.35 SL=1.00 BUY CALL JUL-20 AOL-GD OI=12898 at $0.95 SL=0.50 Average Daily Volume = 24.1 mln SIMG - Silicon Image $9.99 (-0.26 last week) Silicon Image, Inc. designs, develops and markets semiconductors, including transmitters, receivers, controllers and video processors, for applications that require high-bandwidth, cost- effective solutions for high-speed data communications. The Company's primary focus has been on the local interconnect between host systems, such as PCs, set-top boxes and DVD players, and digital displays, such as flat-panel displays, CRTs and televisions. SIMG fell back during Friday's session on the weakness in the broader technology segment of the market. Of course the downgrade of the semiconductor equipment sector by Goldman Sachs certainly didn't help the cause of SIMG, and those of us leaning bullish on this play. Although the stock out paced the broader technology measures and the Philadelphia Semiconductor Index (SOX.X) to the downside, its slide came on relatively lighter volume which may have hinted that the selling pressure wasn't all that serious, and it may have in fact created a more favorable entry point going into next week's trading. The stock fell back to the lower end of its ascending channel visible on the daily chart. With the stock back near support, traders can look to take positions on an intraday bounce or a reversal in the broader market, followed by setting a tight stop just below entry. One place to look for a bounce from is the 10-dma at $10, which the stock just fractionally closed below last Friday. From that entry point, we'll look ahead for a breakout above the $11 level on a return of volume. BUY CALL JUN-7 QSI-FU OI=60 at $2.85 SL=2.00 BUY CALL JUN-10*QSI-FB OI=60 at $1.25 SL=0.75 BUY CALL JUL-10 QSI-GB OI=11 at $1.50 SL=0.75 BUY CALL JUL-12 QSI-GV OI=70 at $0.60 SL=0.25 Average Daily Volume = 702 K NOVN - Noven Pharmaceuticals $24.37 (+3.88 last week) Noven Pharmaceuticals, Inc. is engaged in the development and manufacture of advanced transdermal drug delivery products and technologies and prescription transdermal products. Noven's principal commercialized products are transdermal drug delivery systems for use in hormone replacement therapy. The Company's first product was an estrogen patch for the treatment of menopausal symptoms marketed under the brand name Vivelle in the United States and Canada and under the brand name Menorest in Europe and other markets. Holy cow! NOVN exploded to the upside in today's session on no news. There was talk of an upgrade earlier in the day, but that news was never confirmed. Whatever the reason, the bulls got the upper hand in NOVN and decided to run with it while they had the ball. The stock reached as high as $26.80 earlier in the session before pulling back into the close of trading. More than twice the daily volume exchanged hands in the stock in a day in which the volume on the exchanges were at yearly lows. The intense buying pressure accelerated once the stock cleared the $24 level that we had been pointing out for the last few days. Hopefully the quick breakout above $24 offered traders a quick scalp day trade to above the $26 level. The stock did pullback though, which may bring about another entry opportunity into this super strong play next week. Let's look for the previous resistance at the $24 level to now act as support. Intraday pullbacks to that level on relatively lighter volume can be used to gain new bullish entries into this play, provided that the broader market is strengthening. Ideally, we'll see confirmation in the biotechnology sector as well. Entries taken near the $24 area can target the intraday high near $26.80 for near term upside as a revisit of that level over the coming days is likely. BUY CALL JUN-22*NPQ-FX OI= 86 at $2.80 SL=1.75 BUY CALL JUN-25 NPQ-FD OI= 35 at $1.20 SL=0.50 BUY CALL JUL-22 NPQ-GX OI= 66 at $3.20 SL=2.00 BUY CALL JUL-25 NPQ-GE OI=207 at $1.65 SL=0.75 Average Daily Volume = 206 K ************* NEW PUT PLAYS ************* COHU - Cohu Inc. $24.00 (-1.80 last week) Cohu, Inc. is the owner and operator of businesses in the semiconductor equipment segment, and the television camera segment. The Company's wholly owned subsidiary Delta Design, Inc., designs, manufactures and sells semiconductor test handling equipment to semiconductor manufacturers and semiconductor test subcontractors throughout the world. The Company's Electronics Division designs, manufactures and sells closed circuit television cameras and systems to original equipment manufacturers, contractors and government agencies. The previously much loved semiconductor sector has taken a turn for the worst in recent weeks. Goldman Sachs downgrade of the capital equipment group exacerbated that trend late last week. The brokerage firm lowered its rating on the entire chip equipment group due to the valuation of the stocks following their recent run, and fundamental issues later this year. Other brokerage firms tried to come to the defense of the sector, but it was not enough in a weak broader market environment, which brings us to one of the weakest stocks in the group in COHU. The relatively small chip equipment stock is heading for a major breakdown after last Friday's downgrade of its sector, and it could start as early as next week. Technically, the stock has support at the $24 level where it stopped is decline late last Friday after being sold heavily throughout the entire session. Below the short term support at $24, the stock doesn't have any help until the $20 level below, which was last traded at in January. Traders looking to enter new positions into weakness below current levels should wait for a decline below the $23 mark in conjunction with confirming further weakness in the SOX. From there, we'll confirm the breakdown attempt with a trade down through the $22 level. Rollover traders can look for a bounce followed by weakness near the overhead 10-dma up at the $26 level. The stock had trouble at that level early last week, so we expect that the sellers would return upon a rally back up to that level. Our stop is initially in place at the $26.25 level, just above that 10-dma. BUY PUT JUN-25*QCH-RE OI=45 at $1.80 SL=1.00 BUY PUT JUL-25 QCH-SE OI= 0 at $2.60 SL=1.75 Average Daily Volume = 160 K ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 05-26-2002 Sunday 4 of 5 ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************** CURRENT PUT PLAYS ***************** TTI - Tetra Technologies $25.50 (-0.40 last week) TETRA Technologies, Inc. is an oil and gas services company with an integrated calcium chloride and brominated products manufacturing operation that supplies feedstocks to energy markets, as well as other markets. The Company is comprised of three divisions. The Fluids Division manufactures and markets clear brine fluids dry calcium chloride. The Testing & Services Division provides production testing services and technology and services required for the separation and recycling of oily residuals generated from petroleum refining and exploration and production operations. The oil service sector put in another very volatile week last week as tensions in the Middle East continued to influence traders and investors. Then an uprising between Pakistan and India further fueled the fears of an unstable political environment, which could ultimately lead to a disruption of supply in crude oil from the Middle East. The Oil Service Sector Index ($OSX.X) pulled back ahead of the three day weekend during last Friday's session, which saw the sector fall by about 1.5 percent. For its part, TTI tried to rally when its sector attempted to, but was unable to put in any higher highs, and finally broke down below the three day support level at $25.70 during Friday's pullback in the sector. The stock traded down on decreased volume, but nevertheless broke the level that we had been monitoring for support. That should pave the way for further downside going into next week's trading especially if the OSX.X continues to pullback as TTI is one of the weaker stocks in the broader sector, although it is not a component of the OSX.X itself. For entry points, we can start to look for rollovers from the descending 10-dma now overhead at the $26.46 level, or lower at the previous support at the $25.70 level if the bears try to defend that level. Upon further downside, entries can be taken on a break below last Friday's low at the $25.20 level, then confirmed with a decline below the $24.90 level. We'd like to see some more volume come into the stock on further downside from here to confirm the selling has conviction. BUY PUT JUN-25*TTI-RE OI=137 at $1.25 SL=0.75 BUY PUT JUL-25 TTI-SE OI= 2 at $1.70 SL=0.75 Average Daily Volume = 151 K HB - Hillenbrand $60.42 (-0.72 last week) Hillenbrand Industries, Inc. is a diversified holding company that owns 100% of the capital stock of its three major operating companies serving the funeral services and healthcare industries. The Company's Health Care Group consists of Hill-Rom Company, a manufacturer of equipment for the health care market and provider of wound care and pulmonary/trauma management services. The whipsaws in the broader health care group didn't phase HB very much during last week's volatile trading. The stock slid lower earlier in the week on renewed skepticism of the strength of the healthcare industry in light of the weakness in the broader domestic economy. But it did put on a short lived rally during Thursday's trading, which may have been partially due to the ramp in the biotechnology sector, but also the oversold condition of the stock. The rally higher last Thursday was most likely a short covering situation in which the bears decided it was time to take profits. But then in Friday's session we saw the stock rollover before even attempting to test its bearish 10-dma which closed last Friday at the $61.03 level. The failure to trade up to the 10-dma may portend further weakness in the stock as the buyers show little to no conviction to carry the stock higher. We'll be looking for a breakdown below the recent relative lows in next week's trading to confirm that the trend remains in place. Specifically, we'll look for the $59.50 level to give way to further selling on more weakness in the broader markets. From there we'll again look to target the relative low to the downside near the $58.30 low. Otherwise continue to watch for rollovers from just below the 10-dma or at the 10-dma if it's ever reached to the upside. BUY PUT JUN-60*HB-RL OI=4 at $1.80 SL=0.75 BUY PUT JUL-60 HB-SL OI=2 at $2.35 SL=1.25 Average Daily Volume = 146 K PLAB - Photronics $23.96 (-3.44 last week) Photronics, Inc. and its subsidiaries manufacture photomasks, which are high precision photographic quartz plates containing microscopic images of electronic circuits. Photomasks are a key element in the manufacture of semiconductors, and are used as masters to transfer circuit patterns onto semiconductor wafers during the fabrication of integrated circuits and, to a lesser extent, other types of electrical components. The Company operates principally from 11 facilities, five of which are located in the United States, three in Europe and one each in Korea, Singapore and Taiwan. Goldman Sachs analyst James Covello downgraded the semiconductor capital equipment group Friday morning based upon his belief that the second half of the year could see a slack in demand and a pause in orders for new equipment. Covello didn't attack any companies specifically, but rather the entire semiconductor equipment sector, which sent the bellwethers of the group sliding lower such as Applied Materials (NASDAQ:AMAT), Novellus (NASDAQ:NVLS), and KLA Tencor (NASDAQ:KLAC). The weakness in the chip equipment stocks contributed to the slide in the Philadelphia Semiconductor Sector Index (SOX.X), which finished lower by 3 percent for the day. Although PLAB is a smaller, lesser known player in the global semiconductor industry, the downgrade didn't escape its shares as the stock headed lower for the seventh consecutive session, reaching the $22.95 level before staging an intraday relief rally. Volume remained relatively active again on the way down, but died off as the stock fell under short covering buying pressure into the close of trading. For the day, volume failed to total the 1 million share mark, making Friday's session one of the lightest days of trading activity over the last several weeks. From here, the stock's direction will depend on the sentiment in the semiconductor sector. Further weakness in the SOX.X should lead to lower lows in this stock. Watch for that pull of the SOX.X next week, then look for PLAB to breakdown below its intraday low near the $23 level, or watch for the rollover following more short covering from the $26 level. BUY PUT JUN-25*PQF-RE OI=1440 at $2.20 SL=1.00 BUY PUT JUL-25 PQF-SE OI= 350 at $3.10 SL=1.75 Average Daily Volume = 699 K BRCM – Broadcom Corporation $23.52 (-3.78 last week) Sitting in the sweet spot between the Broadband and Semiconductor sectors, BRCM is a provider of highly integrated silicon solutions that enable broadband digital transmission of voice, video and data to and throughout the home and within the business enterprise. These integrated circuits permit the cost-effective delivery of high-speed, high-bandwidth networking using existing communications infrastructures that were not originally designed for the transmission of broadband digital content. Using proprietary technologies, the company designs, develops and supplies integrated circuits for several markets including digital cable set top boxes, cable modems, high-speed office networks, home networking, and digital subscriber lines. Impatient traders are wondering when BRCM is going to get it over with and finally break down under support. Technically, the breakdown has already happened with the recent lows near $24 giving way and the stock closing below that level on Friday for the first time since October 3rd. Clearly the bulls are attempting to defend the stock in the vicinity of that strong support and if the SOX can rebound next week from the $500 level, they just might be successful. But we can't seem to shake the notion that BRCM shareholders are in for some pain before the next rebound in the stock, with the bearish picture that has been painted on the PnF chart. That breakdown under $24 produced another triple-bottom breakdown with a bearish price objective of $18 (very near the September lows) and given the stock's long descending trend (since January) we think the bears are going to win this battle. We want to initiate new positions on failed intraday rallies to give a better balance of risk and reward, especially given the stock's refusal to go into free-fall when puncturing support levels. Target new entries near the $25 level or even as high as $26.50. We're ratcheting our stop down to $27 this weekend. Should the SOX really catch fire next week (hey, it could happen, even with all the downgrades last week), we'll want to closely monitory BRCM. If it starts participating in the rally, then we'll want to stand aside from initiating new positions and very likely close the play until the bulls have exhausted themselves again. BUY PUT JUN-25 RCQ-RE OI=6572 at $2.90 SL=1.50 BUY PUT JUN-22*RCQ-RX OI=2772 at $1.70 SL=0.75 BUY PUT JUN-20 RCQ-RD OI=4187 at $0.90 SL=0.50 Average Daily Volume = 13.2 mln GS – Goldman Sachs Group $78.19 (-2.31 last week) The Goldman Sachs Group is a global investment banking and securities firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high net-worth individuals. The company provides investment banking, which includes financial advisory and underwriting, and trading and principal investments, which includes fixed income, currency and commodities, equities and principal investments. GS recently completed the acquisition of Spear, Leeds & Kellog, which is engaged in securities clearing, execution and market making, both floor-based and off-floor. The big news in the Brokerage sector (XBD.X) last week was news of the settlement between Merrill Lynch and NY Attorney General, Eliot Spizter. While the news was initially perceived as positive (as if a $100 mln 'settlement' isn't going to have a ripple effect), which pushed many stocks in the sector up to meaningful resistance. But the euphoria quickly faded as investors once again came to terms with the fact that Merrill's woes are likely just the tip of the iceberg. There are class-action suits to be dealt with, and now the SEC is taking a long hard look at industry practices. GS behaved just about how we would expect shooting up near solid resistance near $82, before spending the rest of the week sliding back towards the $78 support level. Adding to the bad news parade, news broke on Friday that the now-defunct company eToys is suing GS for fraud and breach of fiduciary duty, claiming that GS intentionally under-priced its IPO in return for kickbacks from its customers. Whether there is any merit to these claims isn't the issue; it just adds one more weight that the stock and broader industry has to bear. The stock has been caught in a persistent descending trend since the first of April, and the trendline is currently resting right at $80.50, the site of solid resistance for the past month, with the only exception being the settlement-related spike last week. Intraday rallies near this level should continue to make for solid entry points ahead of the next leg lower, particularly if the XBD index remains pinned under its 200-dma (currently $473.75). Traders looking for a breakdown before playing will need to wait for the stock to fall below $77.75 on solid volume, but need to be cognizant of strong support waiting near the $76 level, the site of the 62% retracement. For now, entries on failed rallies provide the better risk-reward dynamic. Lower stops to $81. BUY PUT JUN-80*GS-RP OI=2797 at $3.70 SL=2.00 BUY PUT JUN-75 GS-RO OI=2678 at $1.55 SL=0.75 Average Daily Volume = 3.20 mln ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***** LEAPS ***** Rally Ho?? By Mark Phillips mphillips@OptionInvestor.com Who's afraid of the Big, Bad Bear? Not many in the market place, although you certainly wouldn't know that by looking at the price action in the broad market averages last week. You can see the lack of concern of significant downside action in the market by the lethargic motion in the VIX, which is still holding below the 22 level, despite the fact that none of the major averages were able to sustain any upward motion. Looking under the surface, we can see that with the light volume ahead of the long weekend, the weakness appeared to be due to a lack of buyers, rather than any heavy selling. The other way to gauge the market's reluctance to head south is by looking at some of the stocks that have been notably weak over the past couple months. They just aren't dropping below support. I noticed this in my own trading, as I have continued to probe the downside on weak stocks in sectors such as Semiconductors, Biotechs, Software and Brokers. While I've been marginally successful, it has been a struggle to make a buck on the downside and this is in stark contrast to the easy money that has been available to the downside since mid-March. As I reviewed my short-term trades at the end of the week, I found that the trades that are performing the best are those that are of the bullish stripe. The old trading axiom about never shorting a dull market seems to be at play here, and I get the distinct feeling that the markets want to go up. How long it will last and how far it will go is still to be determined, but for now I'll side with historical patterns. I'm looking for some decent upward movement next week, in part due to the bullish pattern frequently seen in the week after Memorial Day. Does this mean that we can go long with abandon? Not by a long shot! The markets are still in a very precarious position, and we are rapidly approaching the summer doldrums, which are notoriously unfriendly to the bulls. But with weekly charts starting to emerge from oversold on most of the indices and sectors that I track, I believe that the scales are currently tipped in favor of the bulls, at least over the next week or two. We should be better able to gauge the state of the markets by this time next week, with more normal volume patterns likely to emerge after the long weekend. Trade the long side with caution, and keep one eye constantly on the sentiment indicators like the VIX. Should they start to tip in favor of the bears (say the VIX drops back into the 18-19 area) then we'll want to exercise more caution with our bullish plays. In the meantime play the upside for all it is worth. Just remember that if we do in fact get a rally, it will be just the latest bear-market rally, not the beginning of a new bull market. Alright, enough of my rambling. Let's review our plays and then get to the new ones. Portfolio: JNJ - As I mentioned last week, I am still undecided on our JNJ play. I like the way it is holding support, but I want to see the bulls push it up to challenge its highs in the $66 area before I'll be convinced. The week after Memorial Day is typically bullish, so maybe that pattern will hold, giving the DOW and boost, with JNJ kicking back into its bullish mode again. Dips are still buyable for new positions, but keep those stops in place in case support fails to hold in the $59-60 area. MDT - Hey, now that was a pretty decent entry. Let's see if MDT has the ability to move through that first level of resistance. Recall from our prior comments, that the first test for the stock would be the descending trendline near $46.50. Well, MDT cleared that nicely and moved right up to the $47.50 level, which also marked the highs in April. With the daily Stochastics now deep in overbought territory, we'd expect a bit of profit taking to drop the play back into the $46 area to fill Thursday's gap. But then we'll want to see the bulls take charge again, push through current resistance and challenge the next significant level near $49. MSFT - The jury is still out (not that funny with this stock, given its recent and ongoing troubles in the court system), as MSFT meandered between $52-56 last week. We need to see Mr. Softee push through the descending trendline at $57 and historical resistance at $58 before we'll know that the trade is truly going our way. Note that a print at $57 will give the stock an ascending triple-top breakout on the PnF chart and will also represent the first close over the bearish resistance line since the stock was trading near $70 in early January. XOM - There's our entry, thanks to a bit of weakness in the price of Crude Oil last week. Our position was initiated at the close on Wednesday, with a stop placed at $37.50, just below strong support in the January-February timeframe. Watch List: PG - We've been hoping for a dip to give us a decent entry into our PG play and it looks like it is currently underway. Friday's lack of buying interest finally pushed PG back below the center line of its ascending channel, and now all we need is to see the price start to firm up and rebound. This could happen near the $89-90 level and that would be a solid entry. With the daily Stochastics still falling towards oversold though, we might be lucky enough to capture an intraday dip near the bottom of the channel in the vicinity of the $87 level. So long as PG doesn't drop below the lower channel line on a closing basis, I think it is safe to say that we'll be taking a position sometime next week. Remember to wait for the bounce. WMT - The price action in WMT certainly wasn't encouraging last week with the stock drifting lower throughout the week and finally dropping back under the 200-dma on Friday. It looks like we are going to see the prior week's gap get filled and a rebound from the bottom of that gap should provide our best entry point. Look for renewed market strength after the long weekend to help WMT find support and bounce near the $55 level. Should that level fail as support, then we'll need to wait for the rebound to materialize at a lower level and push back through the 200-dma before taking a position. Don't try to catch a falling knife. Wait for the bounce before playing. BRCM - Is anyone else losing patience with BRCM? The bulls are really trying to find support, but it certainly wasn't encouraging to see a drop below the $24 level. I am now convinced that the stock is headed back to test its September lows, but I could be wrong. I would prefer to get the decline out of the way so that we can go long, rather than suffering this slow bleed. I have lowered our entry target to the $18-20 area and that is where I'll be looking to take a position. More aggressive players can try to game a bounce from current levels that is successful in pushing the stock back above the $26 area, but such an endeavor should be accompanied by a tight stop just below the recent lows ($23.50) along with confirmation from the SOX showing some solid bullish action. AMAT - The analyst war in the Semiconductor sector last week, knocked AMAT back for a tumble on Friday and it remains to be seen whether it can maintain its position above the bullish support line, currently at $23. I'm lowering our entry target to $23-24. We want to see the stock rebound from current levels next week and move through $24 before taking a position and then our stop will be placed at $21, just below the 200-dma. BBH - The Biotechnology sector is trying valiantly to get some bullish action going, and it looks like the good news from BGEN on Thursday might be just the ticket. Let the round of profit taking following Thursday's huge ramp job settle out before taking a position, and then hold on for what promises to be a wild ride. This sector is not for the faint of heart, as volatility reigns supreme! Hopefully my description last Wednesday gave you a good understanding of how the introduction of the 2005 LEAPS will progress over the next couple months. Even though the Cycle 1 stocks like MSFT and XOM have had the symbols released for the 2005 LEAPS, I'm going to wait until there is some Open Interest and price data before adding them into our play writeups and Watch List and Portfolio. I would expect to start listing the 2005's within the next couple of weeks and by the end of July we will begin to phase out our coverage of the 2003's as they begin to behave more like normal options (read: time decay). While last week could hardly be described as bullish (or the beginning of any sort of rally) as I had expected, I think we are on the cusp of some significant bullish action. Should the major indices and sectors (like the Semiconductors and Biotechs) manage to hold firm at support, we could be off to the races, at least for a little while. Enjoy your Holiday weekend and take some time to remember what Memorial Day is dedicated to -- all of the servicemen (and women) that have given their lives on the field of battle so that we can enjoy the freedoms we have. Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: JNJ 03/05/02 '03 $ 65 JNJ-AM $ 3.30 $ 2.95 -10.60% $58.50 '04 $ 65 LJN-AM $ 6.40 $ 6.50 + 1.56% $58.50 MDT 05/15/02 '03 $ 45 VKD-AI $ 4.00 $ 5.50 +37.50% $42 '04 $ 45 LKD-AI $ 7.30 $ 9.00 +23.29% $42 MSFT 05/13/02 '03 $ 55 MSQ-AK $ 5.90 $ 6.00 + 1.69% $48 '04 $ 55 LMF-AK $10.20 $11.10 + 8.82% $48 XOM 05/22/02 '03 $ 40 XOM-AH $ 3.00 $ 3.10 + 3.33% $37.50 '04 $ 40 LXO-AH $ 5.10 $ 5.20 + 1.96% $37.50 Puts: None LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: BRCM 10/28/01 $18-20 JAN-2003 $ 25 OGJ-AE CC JAN-2003 $ 20 ORD-AD JAN-2004 $ 25 LGJ-AE CC JAN-2004 $ 20 LGJ-AD PG 03/31/02 $89-90, $87 JAN-2003 $ 95 PG -AS CC JAN-2003 $ 90 PG -AR JAN-2004 $ 95 LPR-AS CC JAN-2004 $ 90 LPR-AR WMT 03/31/02 $55 JAN-2003 $ 60 VWT-AL CC JAN-2003 $ 55 VWT-AK JAN-2004 $ 60 LWT-AL CC JAN-2004 $ 55 LWT-AK AMAT 05/12/02 $23-24 JAN-2003 $ 27 ANQ-AY CC JAN-2003 $ 25 ANQ-AE JAN-2004 $ 30 LPJ-AF CC JAN-2004 $ 25 LPJ-AE BBH 05/26/02 $95-96 JAN-2003 $100 GBZ-AT CC JAN-2003 $ 95 GBZ-AS JAN-2004 $100 KBB-AT CC JAN-2004 $ 95 KOV-AS PUTS: None New Portfolio Plays XOM - Exxon Mobil $40.43 ** Call Play ** Well, that didn't take long! It was nice to have the price of Crude Oil cooperate by showing a bit of weakness last week (dropping back to the $27 level), and that was enough to pull shares of XOM down to the $39.50 area early in the week. After a bit of nip and tuck action, the stock managed to push back above the $40 level on Wednesday, closing at $40.43. That was good enough for us to take our entry, as it gives us a decent upside target near the $44-45 level. This represented a significant top for the stock in March, just like it did a year ago. With the Oil sector still maintaining its solid upward trend, and likely to continue to do so with the unsettled situation in the Middle East, XOM should track higher as we head into the heavy summer driving season. Repeated dips into the $39-40 area can still be used for new entries as the Weekly Stochastics is just emerging from oversold territory, indicating that there is solid upside available in the stock over the next several weeks. We are initiating the play with our stop set at $37.50 and will look to close the play when it reaches the $44-45 area. That gives us a risk of $2.50 and a potential reward of $4-5. Due to the limited range we are attempting to capture, I think you can understand why we are using ATM contracts rather than OTM. We want to capture a solid delta move during a fairly small move in the underlying stock. BUY LEAP JAN-2003 $45 XOM-AH $3.00 BUY LEAP JAN-2004 $45 LXO-AH $5.10 New Watchlist Plays BBH - Biotechnology HOLDR $98.30 **Call Play** Since the Biotechnology index (BTK.X) broke down below the pivotal $450 support level in late April, investors in this sector have been praying for a catalyst to give them hope that a bottom was in place. The picture was dire for the first couple weeks in May as the BTK toyed with another critical support level ($378), which had been the bottom of the sector's range since early 2000. Since bouncing from that level 2 weeks ago, the sector has been seesawing its way higher in volatile fashion, still waiting for that bullish catalyst. That catalyst arrived just in time on Thursday, with the FDA advisory panel deciding to recommend BGEN's psoriasis drug, Amevive for approvability. The action surrounding this decision created some interesting dynamics in the BTK due to the fact that BGEN was halted for trade throughout the day. Investors appeared to utilize the BBH to take advantage of the likelihood of a favorable outcome and on Thursday the BBH ramped higher by more than 7.5% on heavy volume that more than doubled the ADV. Sure enough, BGEN had a stellar day on Friday, gaining more than 22% while the BBH fell back by 3.5%. My read of this action is that once the news was known and BGEN was open for trade, investors unwound their positions in the BBH in favor of holding BGEN. While there is likely to be more weakness in the BBH before it is ready to run higher, I look at the FDA approval as a watershed event for the sector as it marks a change from recent actions by the FDA where they have been extremely stingy with granting drug approvals. Keep in mind that this is still a tentative approval, but I think it bodes well for the action in the sector over the intermediate term. Note that the weekly Stochastics oscillator has solidly begun its advance northwards, and this bodes well for a continuation of the emerging bullish trend. Ideally, I would like to see the BBH come back to confirm support in the $95-96 area (the bottom of the fledgling ascending channel) before initiating new positions, and this should correspond to the daily Stochastics bottoming out near oversold territory. We could see a brief dip as $93 before the Stochastics reach oversold, but I wouldn't want to buy a bounce that low until price advanced back over the $95 level again. Once our entry point is achieved, look to set stops just below the recent lows at $88.50, which correspond to the recent relative lows in the BTK near $378. Should this level be broken, then we'll want to be out of the play in a hurry as it will likely point to significant weakness in the near future. BUY LEAP JAN-2003 $100 GBZ-AT BUY LEAP JAN-2003 $ 95 GBZ-AS For Covered Call BUY LEAP JAN-2004 $100 KBB-AT BUY LEAP JAN-2004 $ 95 KOV-AS For Covered Call Drops None ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 05-26-2002 Sunday 5 of 5 ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************* COVERED CALLS ************* Option Trading 101: Q&A With The Editor By Mark Wnetrzak This week, one of our readers had a question about the assignment of "in-the-money" options and another subscriber commented on the unusually low trading activity in a recent position. Subject: In-the-money options Attn: Mark Wnetrzak Dear Mark, Please explain what happens in this scenario: I write a call with a $5 strike against a long $5 strike LEAPS, which is [much] further out in time. The calls are "in-the-money" at expiration of the short call. Do I lose the time value of the long call or would the broker normally sell the long and buy the short [for me]? Thanks. JL JL, First of all, a broker generally doesn't do anything except assign your account a short position (you'd be short 100 shares for every call written). If you are forced to reconcile the account (as you didn't buy back the short call), you may be required to exercise the LEAP to cover. Of course, with the stock near $5, it may be prudent to simply buy (to cover) the underlying stock, which would let you keep the LEAP (and the time value you paid for), depending on your outlook. Remember, if the short call moves deep-in-the-money fairly quickly, it could be exercised well before expiration. I suggest reading "Options: As A Strategic Investment," by Lawrence McMillan, which covers all aspects of option trading and is an excellent resource for any option trader. Regards, Mark W. OIN Subject: No interest in QSFT options? Attn: Covered-calls editor Good evening, In Sunday's recommendations, QSFT was recommended for both the June 15 call [covered-call] and the June 15 put [short]. I have been watching this stock and I am curious why there is no play [volume] or seemingly any interest in the June 12.5 put paying .75? Not one single contract sold and very little open interest. Can you help me understand this? Thank you, JS JS, First, thanks for using the OIN to supplement your search for profitable trading positions. All of us on the newsletter staff pride ourselves in working for a family-owned company that provides some of the best stock/option research at a reasonable price. Regarding the lack of volume in the $15 and $12.50 Put options; part of the reason may be that the May options recently expired and traders simply haven't moved into the June series. Another reason could be the Market itself, as selling naked-puts is a neutral to bullish strategy and with the current worrisome environment (economic and political), many traders are sitting on the sidelines. Also, the majority of retail traders don't have the ability to sell options "naked" so with the recent rally off the early May low, they may be speculating on the future share price of Quest Software by buying calls. This way they have a fixed risk (the price of the call) with an unlimited reward potential as opposed to selling a naked put which offers a large risk (stock drops to zero) for a low potential reward. Not to mention that with volatility near historic lows (look at the VIX and VXN), most stock options are relatively cheap. Professional traders prefer to buy options when they are cheap and sell them when they are expensive. Hope this helps, Mark W OIN SUMMARY OF PREVIOUS CANDIDATES ***** Note: Margin not used in calculations. Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield MACR 20.32 22.00 JUN 20.00 2.25 *$ 1.93 7.7% INFA 8.16 8.63 JUN 7.50 1.30 *$ 0.64 6.8% UNTD 11.00 11.00 JUN 10.00 1.75 *$ 0.75 5.9% USU 9.34 8.05 JUN 7.50 2.30 *$ 0.46 5.7% INET 7.95 7.50 JUN 7.50 0.90 $ 0.45 5.5% NTIQ 22.10 23.08 JUN 20.00 3.50 *$ 1.40 5.5% RETK 27.45 25.04 JUN 25.00 3.90 *$ 1.45 5.4% QSFT 15.06 14.17 JUN 15.00 1.70 $ 0.81 5.3% PCLE 10.59 10.42 JUN 10.00 1.15 *$ 0.56 5.2% VVTV 21.99 21.75 JUN 20.00 3.10 *$ 1.11 5.1% PCSA 14.12 12.86 JUN 12.50 2.30 *$ 0.68 5.0% GIVN 13.99 14.12 JUN 12.50 2.25 *$ 0.76 4.7% SIE 18.50 17.88 JUN 17.50 2.00 *$ 1.00 4.4% *$ = Stock price is above the sold striking price. Comments: Memorial Day: A time to reflect on the sacrifice of the few for the good of the many. Thanks Dad! How you made it through Iwo Jima, I'll never know... As we move into the Summer Doldrums, two stocks are on our early-exit watch list this week: Quest Software (NASDAQ:QSFT) and AirGate PCS (NASDAQ:PCSA). Positions Closed: Northfield Labs (NASDAQ:NFLD) and Endocare (NASDAQ:ENDO) NEW CANDIDATES ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield CKFR 23.76 JUN 22.50 FCQ FX 2.25 93 21.51 27 5.2% MEDC 14.00 JUN 12.50 MQH FV 2.00 192 12.00 27 4.7% MIPS 7.61 JUN 7.50 MUP FU 0.65 88 6.96 27 8.7% SRP 7.81 JUN 7.50 SRP FU 0.75 665 7.06 27 7.0% USU 8.05 JUN 7.50 USU FU 1.10 2187 6.95 27 8.9% VSNX 11.49 JUN 10.00 MQB FB 1.90 236 9.59 27 4.8% VVTV 21.75 JUN 20.00 UVR FD 2.40 823 19.35 27 3.8% Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield USU 8.05 JUN 7.50 USU FU 1.10 2187 6.95 27 8.9% MIPS 7.61 JUN 7.50 MUP FU 0.65 88 6.96 27 8.7% SRP 7.81 JUN 7.50 SRP FU 0.75 665 7.06 27 7.0% CKFR 23.76 JUN 22.50 FCQ FX 2.25 93 21.51 27 5.2% VSNX 11.49 JUN 10.00 MQB FB 1.90 236 9.59 27 4.8% MEDC 14.00 JUN 12.50 MQH FV 2.00 192 12.00 27 4.7% VVTV 21.75 JUN 20.00 UVR FD 2.40 823 19.35 27 3.8% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** CKFR - Checkfree $23.76 *** New Trading Range! *** Checkfree Corporation (NASDAQ:CKFR) is a provider of electronic billing and payment services. The company operates its business through three independent but inter-related divisions including Electronic Commerce, Investment Services and Software. The company's electronic commerce services are primarily targeted to consumers through financial institutions and Internet portals. Checkfree offers portfolio management and information services for fee-based money managers and financial planners within investment advisory firms, brokerage firms, banks and insurance companies. Checkfree is also a provider of electronic commerce and financial applications software and services for businesses and financial institutions. It designs, markets, licenses and supports software products for automated clearinghouse processing, reconciliation and regulatory compliance. The recent rally in CKFR has put the issue in a new trading range and traders can speculate conservatively on continued bullish activity with this position. JUN 22.50 FCQ FX LB=2.25 OI=93 CB=21.51 DE=27 TY=5.2% ***** MEDC - Med-Design $14.00 *** Bottom-Fishing! *** Med-Design (NASDAQ:MEDC) principally is engaged in the design, development and licensing of safety medical devices intended to reduce the incidence of accidental needle-sticks. Each safety medical device the company designs and develops incorporates its proprietary needle retraction technology. Med-Design’s technology enables health care professionals to retract a needle into the body of the medical device for safe disposal without any substantial change in operating technique. The company's products generally can be categorized into four groups: hypo- dermic syringes used to inject drugs and other fluids into the body; fluid collection devices used to draw blood or other fluids from the body; venous and arterial access devices used to provide access to patients' veins and arteries; and specialty safety devices for other needle based applications. A new contract announced on Thursday with Sultan Chemists will help Med-Design market the Safety Dental Injector directly to dentists. This appears to have spurred a rally this week and the move above the early May high is encouraging. A reasonable cost basis near historical support on a consolidating issue. JUN 12.50 MQH FV LB=2.00 OI=192 CB=12.00 DE=27 TY=4.7% ***** MIPS - MIPS Technologies $7.61 *** Bottom-Fishing: Part II *** MIPS Technologies (NASDAQ:MIPS) is a designer of high-performance and low power consumption processors, cores and related intellectual property for use in a wide variety of increasingly sophisticated consumer and business products. The company's industry standard designs are based on its 32- and 64-bit reduced instruction set computing (RISC) architectures. MIPS licenses its designs and related intellectual property to semiconductor companies and system original equipment manufacturers (OEMs). MIPS currently has more than 50 licenses in place with companies around the world. The recent strength in MIPS started at the end of April after the company announced a licensed agreement with Advanced Micro Devices (NYSE:AMD), which allows AMD to develop 64-bit processors that implement the MIPS64 architecture standard in addition to its current product line of processors based on the MIPS32(TM) archi- tecture standards. MIPS Technologies is the only company in the embedded processor industry to openly license a 64-bit architecture. We simply favor the technical support near $7 and the increasing trading volume as MIPS rallies off the April low. JUN 7.50 MUP FU LB=0.65 OI=88 CB=6.96 DE=27 TY=8.7% ***** SRP - Sierra Pacific $7.81 *** Is The Bad News Discounted? *** Sierra Pacific Resources (NYSE:SRP) is an energy company engaged in electricity generation and distribution, and in natural gas transmission and distribution. The company operates through 2 major utility companies and 6 other, mostly gas-related, companies. Sierra Pacific’s subsidiaries are: Nevada Power Company, Sierra Pacific Power Company, Tuscarora Gas Pipeline Company, Sierra Pacific Communications, Sierra Energy Company, dba e. three, Sierra Pacific Energy Company, Lands of Sierra and Nevada Electric Investment Company. SRP rallied Thursday after Nevada regulators said that Nevada Power can recover $16 million from ratepayers earlier than was previously allowed, increasing the utility's summer cash flow. It isn’t much, considering that PUC of Nevada has hampered Nevada Power’s attempt to recover $437 million of about $922 million it had been seeking, but it’s a start. Will the recent management shakeout help? For the short-term, this position offers a reasonable entry point for those investors who believe the Utility sector is "bottoming." Speculators only please! JUN 7.50 SRP FU LB=0.75 OI=665 CB=7.06 DE=27 TY=7.0% ***** USU - USEC $8.05 *** The Russian Connection? *** USEC (NYSE:USU), global energy company, is in the production and sale of uranium fuel enrichment services for commercial nuclear power plants. For the nine months ended 3/31/02, revenues were up 30% to $1.11 billion while net income fell 87% to $9.1 million. Revenues reflect an increase in the volume of standard units of uranium enrichment and earnings were offset by higher cost of sales as a percentage of revenue due to lower production level. No recent news to explain the surge in USEC's price though the message boards are alive with rumors. Maybe it’s speculation on improved relations with Russia as the company’s new terms with USEC’s Russian partner have yet to be approved by the U.S. and Russian governments. The technical indications suggest the issue has successfully completed its recent consolidation and is poised for future gains. Conservative speculation with a cost basis at a solid technical support area. JUN 7.50 USU FU LB=1.10 OI=2187 CB=6.95 DE=27 TY=8.9% ***** VSNX - Visionics $11.49 *** Merger Mania? *** Visionics (NASDAQ:VSNX) is a worldwide producer of identification technologies and systems. Through its respective business lines, FaceIt, live scan and IBIS, the company designs and manufacturers forensic quality biometric identification systems and develops and deploys facial recognition technology. The FaceIt technology enables a broad range of products and applications built by OEMs, VARs and system integrators. The TENPRINTER and FingerPrinter CMS are live scan systems used by government agencies, law enforcement, airports, banks and other commercial institutions. The IBIS is a remote identification system that combines expertise in biometric capture and connectivity, and is capable of capturing both forensic quality fingerprints and photographs for transmission to law enforcement and other legacy databases. The SEC announced this week that it had finished reviewing the preliminary joint proxy statement for the merger of Identix (NASDAQ:IDNX) and Visionics. Identix in February said it would buy rival Visionics for $269 million in stock. On Thursday, Visionics announced that its latest FaceItŪ ARGUS surveillance system will be used to augment security measures at the Battery Park Screening Facility in the ferry embarkation area to Ellis Island and the Statue of Liberty in the New York harbor during this Memorial Day holiday weekend. We simply favor the technical support near the cost basis in this position and investors who are interested in a portfolio position in the electronic security sector should consider this issue. JUN 10.00 MQB FB LB=1.90 OI=236 CB=9.59 DE=27 TY=4.8% ***** VVTV - ValueVision $21.75 *** A Record First Quarter *** ValueVision (NASDAQ:VVTV) is an integrated direct marketing company that markets its products directly to consumers through various forms of electronic media. VVTV also conducts business under the corporate name ValueVision Media. The company's operating strategy incorporates television home shopping, Internet e-commerce, vendor programming sales and fulfillment services. The company's principal electronic media activity is its television home shopping business, which uses recognized on-air television home shopping personalities to market brand name and proprietary/private label consumer products at competitive prices. Last week, ValueVision announced that it had replaced Arthur Andersen with Deloitte & Touche as their independent auditors. This week ValueVision reported a small quarterly profit as it wrote down fewer investments and booked more revenue from its ShopNBC.com site. More importantly, the company is expecting future sales of $128 million to $133 million, up 22% to 27%. We simply favor the recent break-out above the MAR - APR resistance area (which is now support), which suggest higher prices in the near future. This position offers a conservative method to profit on the near-term movement of the company's share value. JUN 20.00 UVR FD LB=2.40 OI=823 CB=19.35 DE=27 TY=3.8% ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield GNSS 25.00 JUN 22.50 QFE FX 3.60 841 21.40 27 5.8% EXTR 11.33 JUN 10.00 EXJ FB 1.80 2319 9.53 27 5.6% PCLE 10.42 JUN 10.00 PUC FB 0.85 106 9.57 27 5.1% IMCO 13.34 JUN 12.50 IQZ FV 1.35 62 11.99 27 4.8% MACR 22.00 JUN 20.00 MRQ FY 2.80 130 19.20 27 4.7% INVN 24.02 JUN 20.00 FQQ FD 4.80 1643 19.22 27 4.6% KROL 21.00 JUN 20.00 KRQ FD 1.75 243 19.25 27 4.4% EMMS 30.70 JUN 30.00 QMJ FF 1.70 123 29.00 27 3.9% NTIQ 23.08 JUN 20.00 CQJ FD 3.70 38 19.38 27 3.6% ***************** NAKED PUT SECTION ***************** Investing 101: Using S&P 500 Futures To Determine Market Trends By Ray Cummins The term "Fair Value" emerged in one of my E-mails this week but it was not in reference to an option's price; rather it was described as an indicator that futures traders use to determine the market's directional bias prior to the open. Futures Fundamentals A futures contract is the obligation to take delivery (long) or make delivery (short) of an underlying commodity. The contract sets the price of a commodity (corn, wheat, oil, etc) at a point in time in the future. As an example, a farmer grows wheat and wants to sell it to a cereal company. The cereal company wants to buy the wheat, but not until next September so they decide to buy a futures contract from the farmer to deliver the wheat at a fixed (strike) price. Since market conditions are influenced by how much wheat is planted, weather conditions, and other outside factors, the price of wheat will vary, as will the value of the futures contract. If the price of wheat is rising in the market, the futures contract becomes more valuable and can be sold at a profit. The opposite can happen if the price of wheat declines. The option exchanges know that trading futures contracts can be profitable so they have devised instruments not only for tangible commodities but for stock indexes as well. With stock index futures, a trader has a choice between buying a basket of stocks equivalent to the S&P 500, or another index in the cash market and buying a futures contract. You can buy an S&P 500 futures contract which points to a particular value at a specific point in time and you can also sell this contract as its value changes. In the case of an S&P 500 index future, the owner is contracting to receive a predetermined amount ($250 x Index) on the third Friday of the expiration month. This contract is settled in cash (not by delivering a basket of all 500 stocks in the index) and each point on the index is worth $250. If a trader buys stocks with cash, he will incur an opportunity cost, as he could have simply invested in Treasury bills at no risk. Because futures contracts do not require an up-front payment (other than their margin requirement), they do not incur an opportunity cost, and therefore one should be willing to pay more for futures than for the stocks themselves. However, the owner of the stock will receive the stock's dividend (and the interest on that dividend) whereas the owner of futures contract receives nothing. This is a holding cost of the futures and the difference between the index futures price and the price of the cash stock index is called the "basis." When this basis rises to a level where a trader can buy the cash stocks at the "ask" and sell the futures at the "bid," and cover all of the holding costs, computer programs will try to take advantage of the situation. In contrast, when the futures decline too far (relative to the cash price), arbitrageurs will try to sell the stocks and buy the undervalued futures contracts. Understanding "Fair Value" In Futures Futures also have what is called "fair value" and that number is determined by adding the interest cost of holding the stocks and subtracting the expected dividends. Higher interest rates will expand the basis, as will lower dividend rates. For example, if a futures contract has a fair value of 5 points, the average price of the instrument should be 5 points above SPX (cash S&P). When the price moves above or below fair value, a change in the future direction of the market is implied. This is called the "market indicator" of the futures and it reflects public sentiment that provides both offensive and defensive trading opportunities, and allows institutional investors to gauge their portfolio's return relative to a benchmark. For instance, when S&P 500 futures are trading 5 points above fair value, the actual market open should be 40-50 points higher on the Dow (8 - 10 / 1 ratio) and at least a few points higher on the S&P 500 index. The underlying reason for pre-market futures trading is simple: fund managers and institutional investors use futures to increase or reduce exposure to the equities markets as their cash holdings dictate. In addition, many professional traders maintain large positions that can be significantly affected by market direction. Since the most popular index options (OEX, SPX, NDX) on the CBOE do not trade until a large majority of the underlying issues are active, futures are often the only way to manage losses and lock- in gains when unexpected economic data or major news threatens one's portfolio value. Good Luck! *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS CANDIDATES ***** Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield WFR 8.30 7.70 JUN 7.50 0.60 *$ 0.60 13.9% ENDP 11.56 12.85 JUN 10.00 0.55 *$ 0.55 9.5% MACR 23.89 22.00 JUN 20.00 0.60 *$ 0.60 8.3% AMZN 19.16 19.47 JUN 15.00 0.40 *$ 0.40 8.2% RMCI 27.46 30.71 JUN 22.50 0.70 *$ 0.70 7.5% CKFR 23.89 23.76 JUN 20.00 0.65 *$ 0.65 7.4% PLXS 28.00 25.83 JUN 25.00 0.75 *$ 0.75 7.3% GG 18.71 22.16 JUN 17.50 0.70 *$ 0.70 7.3% FLM 25.35 24.28 JUN 22.50 0.80 *$ 0.80 7.2% HDWR 18.42 17.52 JUN 17.50 0.70 *$ 0.70 7.1% RMCI 31.23 30.71 JUN 25.00 0.55 *$ 0.55 7.0% PHSY 30.06 27.62 JUN 25.00 0.60 *$ 0.60 6.9% SIE 19.88 17.88 JUN 17.50 0.65 *$ 0.65 6.5% PHSY 25.87 27.62 JUN 20.00 0.50 *$ 0.50 6.4% TTWO 25.60 25.50 JUN 20.00 0.40 *$ 0.40 6.3% AMZN 16.94 19.47 JUN 12.50 0.30 *$ 0.30 5.9% DCN 22.67 22.30 JUN 20.00 0.45 *$ 0.45 5.7% TDY 19.17 21.24 JUN 17.50 0.60 *$ 0.60 5.6% RDC 26.12 25.92 JUN 22.50 0.50 *$ 0.50 4.9% *$ = Stock price is above the sold striking price. Comments: The bearish trend in U.S. equities resumed Friday as investors opted to exit long positions ahead of the holiday weekend. The current outlook among the general public is one of apprehension and anxiety and there is little chance of any significant change in that attitude in the near future. With that idea in mind, we will continue to focus on limiting downside losses and we will establish new positions only on those stocks with very favorable long-term potential or outstanding technical patterns. Issues on the watch-list (that should be closed breaking recent support areas or trend-lines) include: Sierra Health Services (NYSE:SIE), Headwaters (NASDAQ:HDWR), Plexus (NASDAQ:PLXS), Memc Electronic (NYSE:WFR) and Pacific Healthcare Systems (NASDAQ:PHSY). Positions Closed: Endocare (NASDAQ:ENDO) NEW CANDIDATES ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield ADRX 45.22 JUN 35.00 QAX RG 0.70 1312 34.30 27 8.1% AMZN 19.47 JUN 17.50 ZQN RO 0.65 4043 16.85 27 11.3% IDXX 31.10 JUN 30.00 IQX RF 0.55 55 29.45 27 5.2% MACR 22.00 JUN 17.50 MRQ RW 0.25 164 17.25 27 6.1% NOVN 24.37 JUN 22.50 NPQ RX 0.50 8 22.00 27 6.7% TDY 21.24 JUN 20.00 TDY RD 0.50 4 19.50 27 7.3% TTWO 25.50 JUN 20.00 TUO RD 0.30 325 19.70 27 6.3% WIN 19.20 JUN 17.50 WIN RW 0.30 106 17.20 27 5.4% Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield AMZN 19.47 JUN 17.50 ZQN RO 0.65 4043 16.85 27 11.3% ADRX 45.22 JUN 35.00 QAX RG 0.70 1312 34.30 27 8.1% TDY 21.24 JUN 20.00 TDY RD 0.50 4 19.50 27 7.3% NOVN 24.37 JUN 22.50 NPQ RX 0.50 8 22.00 27 6.7% TTWO 25.50 JUN 20.00 TUO RD 0.30 325 19.70 27 6.3% MACR 22.00 JUN 17.50 MRQ RW 0.25 164 17.25 27 6.1% WIN 19.20 JUN 17.50 WIN RW 0.30 106 17.20 27 5.4% IDXX 31.10 JUN 30.00 IQX RF 0.55 55 29.45 27 5.2% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** ADRX - Andrx Corporation $45.22 *** Recovery Underway! *** Andrx Corporation (NASDAQ:ADRX) commercializes controlled-release oral pharmaceuticals using proprietary drug delivery technologies. The company has nine proprietary controlled-release drug delivery technologies that are patented for certain applications or for which it has filed for patent protection for certain applications. Andrx uses its proprietary delivery technologies and formulation skills to develop bio-equivalent versions of selected controlled release brand name pharmaceuticals, and other controlled release formulations of existing immediate-release or controlled-release drugs. The company is also developing bio-equivalent versions of specialty, niche and immediate-release pharmaceutical products. Traders who like the outlook for Andrx and its unique products can establish a discounted cost basis in the issue with this position. JUN 35.00 QAX RG LB=0.70 OI=1312 CB=34.30 DE=27 TY=8.1% ***** AMZN - Amazon.com $19.47 *** Entry Point! *** Amazon.com (NASDAQ:AMZN) is a Website where customers can find and discover anything they may want to buy online. The company lists millions of unique items in categories such as books, music, DVDs, videos, consumer electronics, toys, camera/photo items, software, computer and video games, tools and hardware, lawn & patio items, kitchen products, and wireless products. Through its Marketplace, Auctions and zShops services, any business or individual can sell virtually anything to the company's 30 million customers, and with Amazon.com Payments, sellers can accept credit card transactions. In addition to its U.S.-based Website, the company operates four internationally focused Websites: www.amazon.co.uk, www.amazon.de, www.amazon.fr and www.amazon.co.jp. The company also operates the Internet Movie Database (www.imdb.com), a source of information on movies and entertainment titles, and cast and crewmembers. Shares of Amazon.com have rallied in recent weeks and the issue appears to be comfortably established in a new trading range near $18-$19. Investors who wouldn't mind owning the stock at a low risk cost basis can speculate its future performance with this position. JUN 17.50 ZQN RO LB=0.65 OI=4043 CB=16.85 DE=27 TY=11.3% ***** IDXX - IDEXX Laboratories $31.10 *** Rally In Progress! *** IDEXX Laboratories (NASDAQ:IDXX) develops, manufactures and sells products and provides various services for veterinary, food and environmental markets. The company's products and services include point-of-care veterinary diagnostic products; laboratory and also consulting services for veterinarians; veterinary pharmaceutical products; information products and services, including software used in animal health applications; diagnostic/health monitoring products and services for production animals; products that test water for certain microbiological contaminants, and products that test milk for antibiotic residues. There's no "public" news to explain the recent high-volume rally but traders who think that something positive is in the works can speculate on that outcome in a conservative manner with this position. JUN 30.00 IQX RF LB=0.55 OI=55 CB=29.45 DE=27 TY=5.2% ***** MACR - Macromedia $22.00 *** Entry Point! *** Macromedia (NASDAQ:MACR) develops, markets, and supports software products, technologies, and services that enable people to define what the Web can be. The company's customers, from developers to enterprises, use Macromedia solutions to help build compelling and effective Websites and eBusiness applications. As a result of the deconsolidation of shockwave.com, the company operates in one major business segment, the Software segment. Shares of web-publishing software company Macromedia soared in April after the company said it expects to return to profitability, on a pro-forma basis, in the June quarter, and remain "in the black" for the rest of the year. Also, revenue showed sequential growth for the first time in a year, and the top line should grow another 10% sequentially in the June quarter, due to a slew of new products that have been released or are scheduled for release in the next few of months. In addition, MACR recently announced the release of several upgrades to its Web software products and on May 10, the company received a favorable verdict in its counterclaims lawsuit against Adobe (NASDAQ:ADBE). Investors can establish a very conservative cost basis in the stock with this position. JUN 17.50 MRQ RW LB=0.25 OI=164 CB=17.25 DE=27 TY=6.1% ***** NOVN - Noven Pharmaceuticals $24.37 *** FDA Approval! *** Noven Pharmaceuticals (NASDAQ:NOVN) is engaged in the development and manufacture of advanced transdermal drug delivery products and technologies and prescription transdermal products. Noven's principal commercialized products are transdermal drug delivery systems for use in hormone replacement therapy. The company's first major product was an estrogen patch for the treatment of menopausal symptoms marketed under the brand name Vivelle in the United States and Canada, and under the brand name Menorest in Europe and other markets. Noven's second-generation estrogen patch was launched in the United States under the brand name Vivelle-Dot. This product is expected to be launched in 2002 in several foreign countries under the brand name Estradot. Noven also developed a combination estrogen/progestin transdermal patch for the treatment of menopausal symptoms, which is marketed under the brand name CombiPatch in the U.S. and under the brand name Estalis in Europe and certain other markets. On Monday, Noven received Food and Drug Administration approval for the expanded use of their Vivelle-Dot in the prevention of postmenopausal osteoporosis. The shares rallied on the news and the move to a new trading range suggests further upside potential in the near future. JUN 22.50 NPQ RX LB=0.50 OI=8 CB=22.00 DE=27 TY=6.7% ***** TDY - Teledyne $21.24 *** Up, Up And Away! *** Teledyne Technologies (NYSE:TDY) is a provider of sophisticated electronic components, instruments and communications products, including data acquisition and communications equipment for airlines and business aircraft, monitoring and control instruments for industrial and environmental applications and components, and subsystems for wireless and satellite communications. Teledyne also provides systems engineering solutions and other information technology services for space, defense and industrial applications, and makes general aviation and missile engines and components, as well as onsite gas and power generation systems. Teledyne has four business segments: Electronics and Communications, Systems Engineering Solutions, Aerospace Engines and Components and Energy Systems. Teledyne was recently awarded a multi-million dollar contract from the U.S. Army Space and Missile Defense Command. Teledyne will provide an array of technical services in support of the Command contract including expertise relating to missiles, optical and radar sensors, targets, command communications, test and evaluation, lethality, systems integration, information technology, simulation, and other areas. The company has also been selected as a strategic subcontractor to Orbital Sciences Corporation to perform work on ground-based boost vehicles for America's missile defense program and has reached a favorable monetary settlement with two of three companies that made and processed allegedly defective steel later made into aircraft engine crankshafts. The bullish "break-out" in TDY suggests further upside activity in the near future. JUN 20.00 TDY RD LB=0.50 OI=4 CB=19.50 DE=27 TY=7.3% ***** TTWO - Take-Two Int. Software $25.50 *** Earnings Play! *** Take-Two Interactive Software (NASDAQ:TTWO) is an integrated developer, marketer, distributor and publisher of interactive entertainment software games and accessories for the personal computer, PlayStation, PlayStation2, Nintendo Game Boy Color, Nintendo GameCube, Nintendo Game Boy Advance and the Xbox. The company publishes and develops products through various wholly owned subsidiaries including Rockstar Games, Rockstar Studios, Gathering of Developers, TalonSoft, Joytech, PopTop, Global Star and under the Take-Two brand name. The company maintains sales and marketing offices in Cincinnati, New York, Toronto, London, Paris, Munich, Vienna, Copenhagen, Milan, Sydney and Auckland. Take Two's game sales jumped 79% in the first quarter while net income quadrupled to $34 million, but an investigation by the SEC overshadowed the company's success. Apparently, investors have decided the probe involving revenue recognition in prior periods will not affect the future because the issue has moved higher since early April. However, the stock has stalled near all-time highs on concerns over Take-Two's upcoming earnings report (due 6/6/02) which will certainly have an effect on its near-term share value. Traders who think the announcement will be favorable can profit from that outcome with this position. JUN 20.00 TUO RD LB=0.30 OI=325 CB=19.70 DE=27 TY=6.3% ***** WIN - Winn-Dixie Stores $19.20 *** Food Sector Hedge! *** Winn-Dixie Stores (NYSE:WIN) is a food and drug retailer. The company operates 1,153 stores in 14 states located primarily in the southeastern United States and the Bahamas Islands. Winn Dixie's retail stores sell groceries, meats, seafood, produce, deli/bakery products, pharmaceutical products and other general merchandise items, such as magazines, soaps, paper products, health and cosmetic products, hardware and numerous household items. In addition, many locations also offer broad lines of merchandise and services, such as company-operated photo labs and in-store banks operated by independent third parties that rent space. Stocks in the food and grocery segment are always popular when the broader equity markets slump and these issues are currently performing very well. Traders who want to hedge their portfolio with a favorable consumer-products stock should consider this position. JUN 17.50 WIN RW LB=0.30 OI=106 CB=17.20 DE=27 TY=5.4% ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield BSTE 31.84 JUN 30.00 BQS RF 1.05 3 28.95 27 9.9% JBL 22.76 JUN 20.00 JBL RD 0.55 1937 19.45 27 9.0% CENT 15.38 JUN 15.00 EQH RC 0.50 0 14.50 27 9.0% MCAF 15.85 JUN 12.50 CFU RV 0.25 89 12.25 27 8.2% IVGN 35.12 JUN 32.50 IUV RZ 0.85 47 31.65 27 7.8% CKFR 23.76 JUN 20.00 FCQ RD 0.35 144 19.65 27 6.5% WSH 31.00 JUN 30.00 WSH RF 0.55 10 29.45 27 5.2% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Just When You Thought It Was Safe, The Bears Return! By Ray Cummins ****************************************************************** - MARKET RECAP - ****************************************************************** Friday, May 24 Stocks slumped today amid lackluster interest among investors and ongoing concerns about the economy and future corporate profits. The Dow Jones Industrial Average plummeted 111 points to 10,104 on losses in its hi-tech components. SBC Communications (NYSE:SBC), Hewlett-Packard (NYSE:HPQ), Microsoft (NASDAQ:MSFT), AT&T (NYSE:T), and Intel (NASDAQ:INTC) accounted for the bulk of the blue-chip losses. The technology index followed suit with semiconductor shares leading the NASDAQ Composite 36 points lower to 1,661. In the broader market, biotechnology, drug, oil service and financial stocks were plundered while gold remained the standard for market bulls. Volume was meager with only 887 million shares traded on the Big Board and 1.17 billion shares changing hands on the NASDAQ. Market breadth was weak, with decliners trouncing advancers 19 to 12 on the NYSE and 21 to 12 on the technology exchange. The bond market edged higher in the wake of equity losses with the 10-year treasury note up 1/32 to yield 5.14% while the 30-year government bond gained 2/32 to yield 5.67%. On the fund flow front, Trim Tabs estimated that all equity funds had outflows of $3.8 billion over the week ending May 22 compared with inflows of $4.0 billion in the prior week. Equity funds that invest primarily in stocks had outflows of $1.1 billion compared with inflows of $1.7 billion in the previous week. Last week's new plays (positions/opening prices/strategy): Affiliated (NYSE:ACS) JUN45P/50P $0.55 credit bull-put Sony Corp. (NYSE:SNE) JUN50P/55P $0.70 credit bull-put Mercury In. (NSDQ:MERQ) JUN50C/45C $0.50 credit bear-call Weatherford (NYSE:WFT) JUN60C/55C $0.60 credit bear-call XL Capital (NYSE:XL) JU100C/95C $0.45 credit bear-call S&P 100 (CBOE:OEX) J580C/575C $0.50 credit bear-call S&P 100 (CBOE:OEX) J520P/525P $0.50 credit bull-put Nvidia (NSDQ:NVDA) JUN40C/40P $7.00 debit straddle All of our new credit spreads on stocks were available at the target entry prices with the exception of XL Capital. However, the position did offer an acceptable opening credit and despite the rally late in the week, the bearish spread has an excellent probability of a profitable outcome. The volatile activity in Monday's early-session trading forced us to adjust both of the OEX spreads ($5) lower in order to initiate the neutral-outlook play at a favorable credit. The "Reader's Request" straddle in Nvidia was very active and the bearish portion of the position traded near $6, approaching a "break-even" exit during Friday's session. Portfolio Activity: The recent extreme market movements continued this week but even with the volatile character of equities there was little activity of significance in the Spreads-Combos portfolio. However, there was one issue that benefited from the brief rally in major drug issues. Shire Pharmaceuticals (NASDAQ:SHPGY) soared to a 3-month high during Friday's session and the upside bias in its shares produced a favorable early-exit gain (up to $1.10) in the bullish synthetic position. Another stock in that category, Shaw Group (NYSE:SGR) also traded at a recent high near the end of the week, offering a profit of up to $0.75 the bullish play. In the credit spread section, all of the current plays are profitable and the rebound in crude prices helped the position in Nabors Industries (NYSE:NBR) remain in the black. At the same time, the share value slump among many of the oil service sector issues has negatively affected our bullish spread in Schlumberger (NYSE:SLB) and the stock should be monitored closely for further downside activity. In the premium-selling category, Adobe Systems (NASDAQ:ADBE) has moved back to the middle of the profit envelope and the effects of time-value erosion have allowed the neutral-outlook position to become profitable, well in advance of its expiration in June. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - One of our long-time readers commented that we have offered very few debit straddles in recent weeks, so here some new candidates for traders who favor volatility strategies. All of these issues have inexpensive option premiums, a history of adequate movement and the potential for future volatility in the underlying stock or its industry. Most of these candidates are very speculative positions, thus traders with a conservative outlook may consider options with future expiration dates. Also, since the Market is closed for the Memorial Day holiday, the entry prices may have to be adjusted to account for the additional time-value erosion. ****************************************************************** AEIS - Advanced Energy $29.88 *** Recent Activity! *** Advanced Energy Industries (NASDAQ:AEIS) designs, manufactures and supports a group of subsystems for vacuum process systems. Their product offerings are classified as direct current, radio frequency, flow and temperature control products, as well as ion and plasma sources, and the unique IKOR products that empower next-generation microprocessors and ASICs. These products are used in plasma-based thin-film processing equipment essential to the manufacture of semiconductors; compact disks, DVDs and other digital storage media; flat-panel PC and television screens; coatings for architectural glass and optics; and a power supply for advanced technology computer workstations. PLAY (speculative - neutral/debit straddle): BUY CALL JUL-30 OEQ-GF OI=580 A=$3.20 BUY PUT JUL-30 OEQ-SF OI=41 A=$3.30 INITIAL NET DEBIT TARGET=$5.20-$5.25 TARGET PROFIT=25-50% ****************************************************************** BRKS - Brooks-pri Automation $29.89 *** Probability Play! *** Brooks-PRI Automation (NASDAQ:BRKS), formerly known as Brooks Automation, Inc., is a supplier of integrated tool and factory automation solutions for the global semiconductor and related industries. Brooks is a global supplier of original equipment manufacturers tool automation and factory management software for the semiconductor, data storage and flat panel display manufacturing industries. Brooks' unique hardware and software automation technologies include vacuum and atmospheric robots, cluster tool platforms and modules, ultra-clean environments for isolating processing equipment and wafers, and factory and tool automation software and integration services. The company has ISO 9001 certification, is headquartered in Chelmsford, Massachusetts, and has direct operations in the United States, Canada, Europe, Japan, Korea, Malaysia, Singapore, Taiwan and China. PLAY (very speculative - neutral/debit straddle): BUY CALL JUN-30 BQE-FF OI=215 A=$2.15 BUY PUT JUN-30 BQE-RF OI=67 A=$2.30 INITIAL NET DEBIT TARGET=$4.20-$4.30 TARGET PROFIT=15-25% ****************************************************************** CTLM - Centillium Comm. $7.66 *** Cheap Speculation! *** Centillium Communications (NASDAQ:CTLM) delivers products that enable broadband communications to the home and business. The company provides broadband equipment vendors with system-level products for the DSL market, and is leveraging its unique core technology and expertise to develop products for complementary markets that share common communications technologies as well as customers. The company also makes a range of products for the Voice-over-Packet market and has recently released products that target the premise networking market. PLAY (speculative - neutral/debit straddle): BUY CALL JUL-7.50 UUM-GU OI=74 A=$1.05 BUY PUT JUL-7.50 UUM-SU OI=252 A=$0.90 INITIAL NET DEBIT TARGET=$1.75-$1.80 PROFIT=25-50% ****************************************************************** COGN - Cognos $22.10 *** Earnings Play! *** Cognos Incorporated (NASDAQ:COGN) is a major provider of business intelligence software solutions. The company develops, markets, and supports an integrated business intelligence platform that allows its customers, as well as their partners, customers, and suppliers, to analyze and report data from multiple perspectives and to coordinate decision-making and actions across the extended enterprise through intranets, extranets, and the Internet. The company's software is designed to provide its customers with the ability to effectively use data to make faster, more informed decisions in order to improve operational effectiveness, increase customer satisfaction, accelerate corporate response times, and, ultimately, increase revenues and profits. Cognos' earnings are due on 6/20/02. PLAY (very speculative - neutral/debit straddle): BUY CALL JUN-22.50 CRQ-FX OI=215 A=$1.10 BUY PUT JUN-22.50 CRQ-RX OI=59 A=$1.55 INITIAL NET DEBIT TARGET=$2.40-$2.50 TARGET PROFIT=15-25% ****************************************************************** CVC - Cablevision Systems $20.84 *** Probability Play! *** Cablevision Systems Corporation ((NYSE:CVC) is a cable operator in the United States through its wholly owned subsidiary, CSC Holdings. Cablevision also has investments in cable programming networks, entertainment businesses and telecom companies. With Rainbow Media Holdings, the company owns interests in and manages numerous national and regional programming networks, the Madison Square Garden sports and entertainment business, and cable TV advertising sales companies. Through Cablevision Lightpath, the company offers switched telephone services as well as high-speed Internet access to the business market. The company also owns or has interests in a large number of complementary businesses and companies including The WIZ, a chain of 43 consumer electronics stores; Clearview Cinemas, a chain of 59 theaters; and Northcoast Communications, LLC, a wireless personal communications services business. PLAY (speculative - neutral/debit straddle): BUY CALL JUL-20 CVC-GD OI=1044 A=$3.00 BUY PUT JUL-20 CVC-SD OI=21 A=$2.05 INITIAL NET DEBIT TARGET=$4.75-$4.85 TARGET PROFIT=30-50% ****************************************************************** JNPR - Juniper Networks $10.08 *** Big Move Coming? *** Juniper Networks (NASDAQ:JNPR) is a provider of purpose-built Internet infrastructure solutions that meet the scalability, performance, density and compatibility requirements of rapidly evolving, optically enabled Internet Protocol networks. Unlike conventional network routers that were originally developed for enterprise applications, Juniper's products are specifically designed, or purpose-built, for service provider networks and to accommodate the size and scope of the Internet. The company's next-generation Internet backbone routers offer its customers increased reliability, performance, scalability, interoperability and flexibility. The company's products combine high-performance, ASIC-based packet-forwarding technology, the unique features of the JUNOS Internet software and a Internet-optimized architecture into a purpose-built solution for the service provider market. PLAY (speculative - neutral/debit straddle): BUY CALL JUL-10 JUX-GB OI=4621 A=$1.35 BUY PUT JUL-10 JUX-SB OI=3729 A=$1.25 INITIAL NET DEBIT TARGET=$2.30-$2.40 TARGET PROFIT=25-50% ****************************************************************** MYL - Mylan Laboratories $30.34 *** Active Drug Sector! *** Mylan Laboratories (NYSE:MYL) is engaged in creating, licensing, manufacturing, selling and distributing generic and brand-name pharmaceutical products. The company conducts business through two primary businesses; the generic (Generic Segment) and branded (Brand Segment) pharmaceutical operating segments. Mylan sells its products primarily to proprietary and ethical pharmaceutical wholesalers and distributors, drug stores, drug manufacturers, institutions and governmental agencies within the United States. The company's Generic Segment consists of two principal business units, Mylan Pharmaceuticals and UDL Laboratories. Mylan's Brand Segment operates principally through its wholly owned subsidiary, Bertek Pharmaceuticals. PLAY (speculative - neutral/debit straddle): BUY CALL JUL-30 MYL-GF OI=1120 A=$1.65 BUY PUT JUL-30 MYL-SF OI=597 A=$1.30 INITIAL NET DEBIT TARGET=$2.75-$2.80 TARGET PROFIT=25-50% ****************************************************************** WMB - Williams Companies $17.42 *** Active Oil Issue! *** Williams Companies (NYSE:WMB) is engaged in the transportation and sale of natural gas and petroleum products and other energy related activities. The company, through its subsidiaries, is engaged in price risk management services; the purchase, sale and arranging of transportation or transmission of energy and energy-related commodities; transportation and storage of natural gas; exploration, production and marketing of oil and gas; direct investments in international energy projects as well as energy infrastructure development funds and soda-ash mining operations; natural gas gathering, treating and processing activities; gas and liquids transportation; transportation of petroleum products and related terminal services; hydrocarbon/olefin transportation; ethylene production; production and sale of ethanol and various bio-products; refining of petroleum products; retail marketing; petroleum products terminal services, and ammonia transportation and terminal services. PLAY (speculative - neutral/debit straddle): BUY CALL JUL-17.50 WMB-GW OI=182 A=$1.40 BUY PUT JUL-17.50 WMB-SW OI=43 A=$1.65 INITIAL NET DEBIT TARGET=$2.75-$2.80 TARGET PROFIT=25-50% ****************************************************************** WON - Westwood One $39.48 *** Media Industry Volatility! *** Westwood One (NYSE:WON) supplies radio and television stations with information services and programming. Westwood One's main source of revenue is selling commercial airtime to advertisers through one of its two primary operating divisions, which are Metro/Shadow, which is comprised of Metro Networks, and Shadow Traffic, and the Network Division. Westwood generates revenue by selling audience it obtains from radio and TV affiliates to local and national advertisers. Metro/Shadow provides traffic and information broadcast reports in over 80 Metro Survey Area markets in the United States. The Network Division offers radio stations traditional news services, CBS Radio news, CNN Radio and Fox news, in addition to seven 24-hour satellite-delivered continuous play music formats and weekday and weekend news and entertainment features and programs. PLAY (conservative - neutral/debit straddle): BUY CALL OCT-40 WON-JH OI=424 A=$3.20 BUY PUT OCT-40 WON-VH OI=100 A=$3.50 INITIAL NET DEBIT TARGET=$6.30-$6.50 TARGET PROFIT=50-75% ****************************************************************** ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************ MARKET WATCH ************ The holiday shortened session next week may bring some surprise volatility. We will take movement in either direction. To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/052602.asp ************** MARKET POSTURE ************** Minimal movement generally portends volatility. We will see what happens next week. 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